When you take out a home loan or review an existing one, you’ll need to make a decision to go with a variable rate, a fixed interest rate or a combination of both. It’s a choice that can affect your monthly repayments, flexibility and ultimately your peace of mind around your household budgeting.
There’s not one correct answer for everyone. The right choice depends on your personal circumstances, your financial goals, and how you feel if rates moved sharply in either direction.
Here’s what you need to know.
What is a fixed rate home loan?
A fixed rate loan locks your interest rate in place for a set period of time, typically between one and five years. During that time, your repayments stay exactly the same, regardless of what the Reserve Bank of Australia (RBA) does with the cash rate.
At the end of the fixed period, your loan will revert to a variable rate which isn’t always super competitive. When your fixed rate term ends, this can be an important moment to review your options to see what other lending options might be available.
The appeal of certainty
The biggest benefit of fixing your rate is predictability. You know exactly what your repayment will be for the next one, two or three years (or however you fix in for). For households managing a tight budget, or for borrowers who are stretched and can’t absorb higher repayments if rates rise, this certainty has real value.
Fixing can also make sense when rates are low and you expect them to rise. The issue with this approach is that it’s almost impossible to predict the best time to fix in because even economists and the Reserve Bank regularly get the rate forecasts wrong.
The cost of fixing
Fixed rate loans come with trade-offs. The main ones to be aware of:
- Extra repayments are usually capped — most lenders limit how much extra you can pay during the fixed period. So if you come into money, or planning to pay down your loan as quickly as possible, this can be frustrating.
- Break costs can be painful — if you need to exit a fixed loan early (because you’re selling, refinancing or your circumstances change), the lender can charge a ‘break cost’. This can run into thousands of dollars depending on how much rates have moved since you fixed.
- No offset account — most fixed rate loans don’t offer a fully functional offset account, which means you lose out on that powerful interest-saving tool.
- You miss out on rate cuts — if rates fall during your fixed period, you’re stuck paying the higher rate while variable borrowers benefit.
What is a variable rate home loan?
A variable rate loan moves with the market. When the RBA cuts the cash rate, your lender (usually, though not always immediately) passes some or all of that on to you. When rates rise, your repayments go up.
Variable rate loans are generally more flexible because most allow unlimited extra repayments, they come with redraw facilities and also allow offset accounts to be linked to them. All of these tools can significantly reduce the interest you pay over time.
The appeal of flexibility
If your financial position is strong and you have the capacity to absorb some rate movement, variable loans give you more tools to work with. The ability to make unlimited extra repayments, combined with a well-used offset account, can save years off your loan and tens of thousands of dollars in interest.
Variable loans are also easier to exit because you won’t generally be charged a break cost if you decide to refinance or sell.
The risk of uncertainty
The obvious downside to variable rate loans is that your repayments can increase. We saw this play out sharply between 2022 and 2024. Over this time, the RBA lifted the cash rate from 0.10% to 4.35%; a significant jump that hit variable rate borrowers hard.
If your budget is already tight, an unexpected rate rise can put real pressure on your finances. This is why many borrowers, especially those who are new to homeownership or have purchased right at the top of their borrowing capacity, are initially drawn to the security of a fixed rate loan.
At a glance — fixed vs variable
| Fixed Rate | Variable Rate | |
| Interest rate certainty | ✓ Rate locked for term | ✗ Rate can move anytime |
| Repayment stability | ✓ Same every month | ✗ Can go up or down |
| Benefit from rate cuts | ✗ Locked out during term | ✓ Immediately |
| Extra repayments | ✗ Usually capped or restricted | ✓ Typically unlimited |
| Offset account | ✗ Rarely available on fixed | ✓ Common feature |
| Break costs if you exit early | ✗ Can be significant | ✓ Usually none |
| Suits who? | Budgeters, rate-rise worriers | Flexible payers, offset users |
What about splitting your loan?
A split loan lets you fix a portion of your loan balance and leave the rest on a variable rate. For example, you might fix 60% of your loan for certainty on the bulk of your repayments, while keeping 40% variable so you can make extra repayments and use an offset account.
It’s a sensible middle ground for many borrowers because you get some protection against rate rises, but you maintain some of the flexibility. The split doesn’t have to be 50/50; it can be whatever proportion makes sense for your situation.
What’s the right move right now?
The best approach is to review your specific situation: your loan balance, your cash flow, your buffer, your plans for the property, and how you’d cope if rates moved.
Fixed vs variable is a conversation we’re having with lots of our clients right now, so please reach out if you’re wanting to discuss what might be right for you.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to your circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
