As the name implies, a fixed interest rate locks in the interest rate you pay for the duration of the term specified. A three-year fixed interest rate of 2.50% p.a., for example, will remain at that rate for three years regardless of economic pressures or the lender's needs before reverting to a standard variable rate.

The most significant advantage of a fixed-rate loan is the certainty of cash flow. Your repayments remaining constant for a known period of time can make budgeting much easier because you know exactly how much your repayments will be. This makes fixed-rate home loans popular among investors and first-time buyers during the first two to three years of ownership.

Of course, if interest rates fall, this can be a disadvantage. A fixed-rate home loan's locked nature means that any reductions in a lender's interest rates for any reason (such as recent changes in the cash rate) will not be passed on to you, causing you to pay hundreds, if not thousands, of dollars more in interest. Furthermore, the variable rate that the loan will revert to at the end of the fixed-rate period (known as the revert rate) can be significantly higher than some of the lower variable rates available, so you may want to consider refinancing to a different loan around this time.