Fixed vs variable home loan: which is right for you?

Home Loans
Written By Kim Skilton

Written by Kim Skilton | Mortgage Broker

In this Article:

Fixed or variable interest rate - it's one of the first questions that comes up once you've decided to take out a home loan, and one of the most common things people ask me. There is no universally correct answer. The right choice depends on your financial position, your plans for the property, and how you feel about uncertainty. This guide walks through both options clearly so you can make an informed decision.

Why the fixed vs variable decision matters

Your interest rate structure affects more than just your repayment amount. It determines your flexibility, your ability to make extra repayments, whether you can use an offset account, and what it would cost you to exit the loan early. Getting this decision right, or at least making a considered choice rather than a default one, can save you a meaningful amount over the life of the loan.

It's also worth knowing upfront that the decision isn't permanent. Fixed terms end. Variable loans can be refinanced. A choice that made sense when you took out the loan can always be revisited as your circumstances or the rate environment changes.

How the RBA cash rate affects your home loan

The Reserve Bank of Australia (RBA) sets the official cash rate which is the benchmark interest rate that influences what lenders charge on home loans. When the RBA raises the cash rate, lenders typically increase their variable home loan rates within weeks. When the RBA cuts, variable rates generally fall in turn.

Fixed rates work differently. They don't simply reflect the current cash rate - they reflect where lenders and the broader financial markets expect rates to be over the fixed term. Fixed rates are priced off the bank bill swap rate (BBSW), a forward-looking wholesale rate, rather than the current RBA rate. This is why fixed and variable rates can diverge significantly depending on where the market expects rates to move.

Understanding this distinction matters for the fixed vs variable decision. If markets expect rates to fall, fixed rates may already price that in which can make fixing less attractive than it appears. If markets expect rates to rise, fixed rates may already be higher than current variable rates to compensate for that risk.

The current cash rate and rate outlook change regularly. Before making any loan decision, I'll walk you through where rates sit at the time and what the current fixed vs variable comparison looks like for your loan amount and term.

What is a fixed rate home loan?

A fixed rate loan locks your interest rate for a set period, typically one, two, three or five years. During that time, your repayments stay exactly the same regardless of what the RBA does with the cash rate.

The advantages of fixing

  • Certainty: your repayments don't change, which makes budgeting straightforward particularly useful if your household income is tight or your expenses are high

  • Protection from rate rises: if variable rates increase during your fixed period, your repayments are unaffected

  • Peace of mind: for borrowers who find rate uncertainty stressful, knowing exactly what you'll pay each month has real value

The disadvantages of fixing

  • Limited flexibility: most fixed rate loans cap or restrict extra repayments, commonly around $10,000 per year, which limits your ability to get ahead on the loan

  • No offset account: fixed loans typically don't support a linked offset account, which is one of the most effective tools for reducing the interest you pay over time

  • Break costs: if you need to exit a fixed loan before the term ends, because you sell, refinance, or your circumstances change, break costs can be substantial. These are calculated based on the difference between your fixed rate and current market rates, and can be difficult to predict

  • You may miss rate cuts: if rates fall during your fixed period, your repayments won't decrease with them

What is a variable rate home loan?

A variable rate loan moves with the market. When the RBA changes the cash rate, lenders typically adjust their variable rates accordingly. Your repayments go up or down over time depending on rate movements.

The advantages of going variable

  • Flexibility: make extra repayments at any time without penalty is one of the most powerful ways to reduce the total interest you pay over the life of the loan

  • Offset accounts: variable loans are typically compatible with offset accounts, which reduce the balance on which interest is calculated day to day. If you're disciplined about keeping money in offset, this can save a significant amount over time

  • Redraw facility: access any extra repayments you've made if you need funds for another purpose

  • No break costs: sell or refinance at any time without penalty which is important if your plans might change

  • Rate cuts pass through: when the RBA cuts rates, your repayments reduce automatically

The disadvantages of going variable

  • Uncertainty: your repayments can increase if rates rise which can affect your budget and financial planning

  • Harder to plan: without a fixed repayment amount, some borrowers find it more difficult to forecast their finances over the medium term

What about splitting your loan?

A split loan, part fixed, part variable, sits between the two and is a practical choice for borrowers who want elements of both without committing entirely to either.

A common approach is to fix the majority of the loan to secure certainty on most of your repayments, while keeping a portion on variable with an offset account attached. This gives you rate protection on the bulk of the debt, while retaining the flexibility and interest-reducing benefits of offset on the remainder.

There's no single correct split ratio. The right proportion of fixed to variable depends on your repayment capacity, how much you want in offset, whether you plan to make significant lump-sum repayments, and your overall risk tolerance. This is something I work through with clients as part of structuring the right loan.

Fixed or variable - which is right for you?

Here's a practical framework rather than a generic answer:

Consider fixing if:

  • Your household budget is tight and repayment certainty matters more than flexibility

  • You're risk-averse and rate rises would cause genuine financial stress

  • You don't plan to make large extra repayments or sell the property in the near term

  • You're in a period of rising rates and want to lock in before they go higher

  • You're comfortable potentially missing out on rate cuts if the market moves the other way

Consider variable if:

  • You have a financial buffer and can absorb rate movement without it significantly affecting your lifestyle

  • You want to use an offset account as this is one of the most effective long-term strategies for reducing your total interest cost

  • You plan to make regular extra repayments to pay the loan down faster

  • You want maximum flexibility in case your circumstances change such as a new job, growing family, investment plans

  • You're in a period of falling or stable rates and want your loan to benefit if rates continue to drop

Consider splitting if:

  • You want certainty on most of your repayments without giving up all flexibility

  • You'd like the benefit of an offset account on part of the loan while fixing the majority

  • You're genuinely torn between the two and a middle ground makes more sense than forcing a decision either way

Is it better to pay LMI or lock in a fixed rate to save on repayments?

This is a separate question that sometimes gets confused with the fixed vs variable decision however they are independent choices. Your LVR (and whether LMI applies) is determined by your deposit size, not your rate type. You can have a fixed or variable loan regardless of whether you've paid LMI.

How long should I fix for?

Fixed rate terms in Australia typically range from one to five years. Shorter terms offer more flexibility and you return to variable (or can refix) sooner. Longer terms offer more extended certainty but carry greater risk if rates fall significantly during the period.

The right term depends on the rate differential between the options available at the time, your plans for the property, and your view on where rates are headed. As a general principle, fixing for longer makes more sense when the rate environment is rising and you want extended protection; fixing for shorter or not at all tends to make more sense when rates are expected to fall.

I'll model the actual numbers for your loan at current rates so you can compare scenarios side by side rather than guessing.

What happens at the end of a fixed rate term?

When your fixed term ends, your loan automatically rolls onto the lender's standard variable rate which may be higher than the most competitive rates available in the market at that time. This is commonly called the 'revert rate' and it's worth being aware of before you fix.

A good broker will contact you in advance of your fixed term expiring to reassess your options whether that's refixing, switching to variable, or refinancing to a more competitive lender altogether. I build this into my ongoing client process as a matter of course.

Can I switch from fixed to variable, or vice versa?

Yes you can, however there are costs to consider. Switching from a fixed rate loan before the term ends typically incurs break costs, which can be substantial depending on how much rates have moved since you fixed. Switching from variable to fixed is generally straightforward and cost-free, though we’d need to check whether your lender offers the option mid-loan or whether it requires refinancing.

If you're considering switching, the first step is to get a break cost estimate from your lender before making any decision. I can help you assess whether the switch makes financial sense once you know the numbers.

Ready to find out what a broker can actually do for you? Book a free, no-obligation call with Maison Mortgages. I'll explain exactly what I can access on your behalf and what the process looks like from here.

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The information contained within this page is general in nature. It serves as a guide only and does not take into account your personal financial needs. Before you act on this information you should seek independent legal and financial advice.

Kim Skilton
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