Fixed vs Variable Rate Home Loan: Which Should You Choose?
Definition
Fixed vs Variable Rate Home Loan
A fixed-rate home loan locks in your interest rate for a set period (typically 1 to 5 years), giving you certainty over repayments. A variable-rate home loan moves up or down with the market, offering more flexibility but less predictability. Most Australian borrowers choose between the two, or combine them in a split loan.
Choosing between a fixed and variable rate is one of the biggest decisions you will make when taking out a home loan in Australia. There is no universally right answer, the best choice depends on your financial situation, your tolerance for rate changes, and the current interest rate environment. For a broader overview of all loan types, read mortgage types explained for Australian buyers.
Fixed Rate vs Variable Rate Comparison
Key Differences at a Glance
| Criteria | Fixed Rate | Variable Rate |
|---|---|---|
| Interest rate | Locked for a set period (1-5 years). Does not change regardless of RBA decisions | Can change at any time based on RBA cash rate movements and lender decisions |
| Repayment certainty | Repayments stay the same during the fixed period, easier to budget | Repayments can increase or decrease as rates move |
| Extra repayments | Usually capped at $10,000-$20,000 per year or not allowed at all | Unlimited extra repayments on most loans |
| Offset account | Rarely available. Some lenders offer a partial offset | 100% offset accounts widely available |
| Redraw facility | Usually not available during the fixed period | Available on most variable loans at no extra cost |
| Break costs | Significant break costs if you exit early, refinance, or sell during the fixed period, can be tens of thousands of dollars | No break costs. Discharge or switching fees are typically small ($150-$350) |
| Rate risk | Protected if rates rise. Locked out of savings if rates fall | Benefit from rate cuts. Exposed to rate rises |
| Portability | Limited, most fixed loans cannot be transferred to a new property without breaking the fix | Many variable loans allow portability if you sell and buy simultaneously |
What is a Split Loan?
A split loan divides your mortgage into a fixed portion and a variable portion. For example, you might fix 60% of a $600,000 loan at a locked-in rate and leave 40% on variable. This hedges your bets, the fixed portion gives you repayment certainty, while the variable portion provides access to features like offset and unlimited extra repayments.
Split loans are popular in Australia because they offer a middle ground. You can choose any ratio that suits your situation, and some lenders allow you to fix different portions at different terms (for example, fixing half for 2 years and half for 3 years).
When to Choose Fixed vs Variable
Consider fixing your rate when:
- Interest rates are expected to rise and you want to lock in a lower rate
- You need predictable repayments for budgeting (e.g., you are on a fixed salary)
- You do not plan to sell, refinance, or make large extra repayments during the fixed term
Consider a variable rate when:
- Interest rates are expected to fall or are already elevated
- You want full flexibility, offset accounts, unlimited extra repayments, and the option to refinance
- You may sell the property or change your financial situation within a few years
- You are a property investor who benefits from an offset account for tax purposes
What Happens When the Fixed Period Ends?
When your fixed term expires, most lenders automatically roll your loan onto their standard variable rate, which is typically much higher than the discounted rates advertised to new customers. This is sometimes called the "loyalty tax." To avoid paying more than you need to, you should either negotiate a new rate with your lender or refinance to a more competitive loan before (or shortly after) the fixed period ends. Use our mortgage calculator to compare repayments under different rate scenarios.
Frequently Asked Questions
Yes, but you will likely pay break costs. Fixed-rate break costs in Australia can range from a few hundred to tens of thousands of dollars, depending on the remaining term, your loan size, and how much wholesale rates have changed since you locked in. Always request a break cost estimate from your lender before deciding.
Not always. Fixed rates can be higher or lower than variable rates depending on market conditions. When the market expects rates to rise, fixed rates are often higher. When the market expects rates to fall, fixed rates may be lower than current variable rates. Compare both at the time you are applying.
Yes, but it is generally less common. Most property investors prefer variable rates because they want access to offset accounts (to preserve tax deductibility) and the flexibility to sell or refinance without break costs. However, fixing can make sense if you want repayment certainty on a long-term hold.
In Australia, the most popular fixed terms are 2 and 3 years. Shorter terms (1-2 years) give you flexibility to reassess sooner, while longer terms (4-5 years) offer more certainty but higher break cost risk. Very few Australian lenders offer fixed terms beyond 5 years.
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