Fixed vs Variable Home Loan Rates: How to Choose in the Current Market

How Variable Rates Work

A variable rate home loan means your interest rate can change at any time. When the Reserve Bank of Australia (RBA) raises or lowers the cash rate, your lender will usually adjust your rate to match.

If the RBA cuts rates, your repayments go down. If they raise rates, your repayments go up. Your lender can also change your rate independently of the RBA, although this is less common.

The main advantage of variable loans is flexibility. You can usually make unlimited extra repayments, access a redraw facility, and use an offset account. These features can save you tens of thousands in interest over the life of the loan.

The downside is unpredictability. If rates rise sharply, your repayments could increase by hundreds of dollars a month. For some borrowers, that uncertainty is uncomfortable.

How Fixed Rates Work

With a fixed rate loan, your interest rate is locked in for a set period. This is usually between one and five years. During that time, your repayment stays exactly the same regardless of what the RBA does.

When the fixed period ends, your loan automatically reverts to the lender's standard variable rate (often called the revert rate). This revert rate is typically higher than the advertised variable rate, which is why many people either refinance or renegotiate before the fixed term expires.

Fixed loans give you certainty. You know exactly what your repayments will be for the next one to five years. This makes budgeting straightforward and protects you from rate rises.

The trade-off is less flexibility. Most fixed loans limit extra repayments to $10,000 to $20,000 per year. You usually cannot access an offset account. And if you want to break the loan early (to refinance or sell), you may face significant break costs.

Side-by-Side Comparison

The Split Loan Option

You do not have to choose one or the other. A split loan lets you fix a portion of your loan and keep the rest on a variable rate. For example, you might fix 60% and leave 40% variable.

This gives you the best of both worlds. The fixed portion protects a chunk of your repayments from rate rises. The variable portion gives you access to an offset account and the flexibility to make unlimited extra repayments.

Many borrowers find this is the most comfortable option, especially when the direction of rates is uncertain. You are not betting everything on rates going one way.

Use our Loan Repayment Calculator to model different split scenarios. Run the fixed portion and variable portion separately to see what your total repayments would look like.

Break Costs Explained

If you are on a fixed rate and want to refinance, sell your property, or make a large extra repayment beyond the allowed limit, you will likely face break costs. These are fees the lender charges to compensate for the interest they will miss out on.

Break costs are calculated based on the difference between your fixed rate and the current wholesale rate, multiplied by the remaining term and your loan balance. They can range from a few hundred dollars to $50,000 or more on large loans with several years remaining.

This is the single biggest risk with fixed loans. If rates drop significantly after you lock in, you could be stuck paying a higher rate with no affordable way out.

Before fixing your rate, always ask your lender to explain how their break costs are calculated. And think about whether your situation might change during the fixed period. If there is a chance you will sell or refinance, a shorter fixed term (one to two years) may be safer.

When Fixed Makes Sense

• You are on a tight budget and need to know exactly what your repayments will be each month.
• You believe rates are likely to rise and want to lock in a lower rate before they do.
• You do not plan to sell, refinance, or make large extra repayments during the fixed period.
• You do not need an offset account or redraw facility.
• You sleep better at night knowing your repayments are predictable.

When Variable Makes Sense

• You want the flexibility to make extra repayments and pay off your loan faster.
• You want to use an offset account to reduce your interest.
• You think rates might drop, and you want to benefit from lower repayments when they do.
• You might sell or refinance in the near future and want to avoid break costs.
• You are comfortable managing some uncertainty in your monthly budget.

Five Questions to Help You Decide

Before you make a call, ask yourself these five questions.

1. Could I handle a rate increase of 1% to 2% on my variable loan? If the answer is no, fixing at least a portion of your loan makes sense.
2. Do I have savings sitting in a bank account that could be working harder in an offset? If yes, a variable loan with an offset could save you more than the certainty of a fixed rate.
3. Am I likely to sell or change my living situation in the next two to five years? If yes, be careful with long fixed terms because of break costs.
4. Do I want to make extra repayments to pay my loan off faster? If yes, variable gives you more room to do that.
5. What does the market expect? Check where economists think rates are heading. If most forecasts point to rate cuts, variable might be the better short-term play. If rates are expected to rise, fixing could protect you.

There is no perfect answer. The right choice is the one that lets you sleep well and fits your financial plan.