In today's dynamic housing market, choosing between a fixed or variable rate home loan is one of the most critical decisions you'll make as a borrower. With interest rates fluctuating and economic conditions constantly changing (Trump Tariffs, Inflation, Federal election) , understanding the difference between these two options isn't just helpful—it's essential for your financial wellbeing.
As mortgage brokers who work with first-time buyers, investors, and refinancers every day, we've put together this comprehensive guide to help you make an informed choice that aligns with your financial goals and lifestyle needs.
What's the difference between fixed and variable rate home loans?
Before diving into which option might be right for you, let's clarify exactly what each loan type means:
Fixed rate home loans
A fixed rate home loan locks in your interest rate for a specified period (typically 1-5 years). During this time, your repayments remain unchanged regardless of what happens in the broader economy or with the Reserve Bank's cash rate.
Variable rate home loans
With a variable rate home loan, your interest rate can change at any time based on economic conditions, funding costs for banks, and changes to the Reserve Bank's cash rate. When rates go up, so do your repayments—and when rates fall, you'll pay less.
Pros and cons of variable rates
Let's break down the advantages and disadvantages of variable rate loans to help you decide if they're right for your situation.
Pros of variable rate loans
1. Greater flexibility and features
Variable loans typically come with more flexible features than their fixed counterparts. These often include:
- Unlimited extra repayments: You can pay off your loan faster without penalty
- Offset accounts: Reduce the interest you pay by linking your savings
- Redraw facilities: Access extra funds you've paid into your loan if needed
- Easier refinancing: Switch lenders without break costs if you find a better deal
2. Potential savings when rates fall
If interest rates decrease, you'll automatically benefit from lower repayments without having to refinance or renegotiate your loan.
3. No break costs
Unlike fixed loans, you won't face hefty break costs if you decide to sell your property, refinance, or pay off your loan early.
Cons of variable rate loans
1. Unpredictable repayments
The most significant drawback is uncertainty. Your repayments can increase at any time, potentially stretching your budget if rates rise substantially.
2. Budgeting challenges
The fluctuating nature of variable loans makes it harder to plan your finances with precision over the long term.
3. Stress during rate increases
When rates rise, the stress of increasing repayments can take an emotional toll, especially if you're already stretched financially.
Pros and cons of fixed rates
Fixed rate loans offer different advantages and considerations that may make them more suitable depending on your circumstances.
Pros of fixed rate loans
1. Predictable repayments
With a fixed rate, your repayments remain constant throughout the fixed term, making budgeting simpler and more reliable.
2. Protection against rate rises
If interest rates increase during your fixed term, you're protected from higher repayments until the fixed period ends.
3. Peace of mind
For many borrowers, especially first-home buyers or those on tight budgets, the certainty of fixed repayments provides valuable peace of mind.
Cons of fixed rate loans
1. Limited flexibility
Fixed loans typically restrict additional repayments or cap them at a certain amount per year, limiting your ability to pay down your loan faster.
2. Missing out on rate cuts
If interest rates fall, you won't benefit from lower repayments during your fixed term.
3. Significant break costs
If you need to exit your fixed loan early—whether to sell, refinance, or make substantial extra repayments—you may face hefty break costs that can run into thousands of dollars.
4. Fewer features
Fixed loans often don't offer the same features as variable loans, such as offset accounts or unlimited redraw facilities.
The split loan option: best of both worlds
Can't decide between fixed and variable? A split loan might be your answer.
With this option, you divide your loan into two portions—one fixed and one variable. This approach lets you:
- Gain some protection against rate rises on the fixed portion
- Maintain flexibility and features on the variable portion
- Customise the split ratio based on your comfort level and financial situation
For example, you might fix 70% of your loan for stability while keeping 30% variable to make extra repayments and benefit from an offset account.
How to choose between fixed and variable rates
Consider these key factors when making your decision:
1. Your financial situation
- Tight budget? The predictability of a fixed rate might be safer
- Strong financial position? The flexibility of a variable rate could save you money long-term
2. Your risk tolerance
- Risk-averse? Fixed rates offer more certainty and less stress
- Comfortable with some uncertainty? Variable rates might work better
3. Economic outlook
- Rates expected to rise? Fixing could save you money
- Rates expected to fall? Variable might be better
- Uncertain outlook? A split loan offers some protection either way
4. Your property plans
- Planning to sell within 1-3 years? Variable avoids potential break costs
- Staying put long-term? Either option works, depending on other factors
5. Need for loan features
- Want offset accounts and unlimited extra repayments? Variable offers more features
- Priority is payment certainty? Fixed might outweigh the need for features
Examples: who benefits from each option?
Fixed rate might be better for:
- First-home buyers stretching their budget who need payment certainty
- Investors looking for predictable cash flow from their investment properties
- Borrowers in periods of rising interest rates who want to lock in before rates climb higher
- Those on strict budgets who need consistent repayments for planning
Variable rate might be better for:
- Borrowers with comfortable buffers who can handle some repayment fluctuation
- Those looking to pay off their loan faster through extra repayments
- People expecting to sell or refinance within a few years
- Borrowers in periods of falling interest rates who want to benefit from decreases
What about reversion rates?
An important consideration with fixed loans is the reversion rate—the rate your loan reverts to after the fixed period ends.
Some lenders revert to their standard variable rate, which can be significantly higher than what they offer new customers. This "loyalty tax" means you might end up paying more than necessary if you don't refinance when your fixed term ends.
Always check what rate your loan will revert to and be prepared to negotiate or refinance when the time comes.
What’s happening with rates in 2025?
While no one has a crystal ball, the broad consensus across the major bank economists is that rates are likely to be cut slowly over 2025 and 2026. Australia’s four major banks—Westpac, NAB, Commonwealth Bank (CBA) and ANZ—have revised their forecasts following the RBA’s March 2025 decision to cut the cash rate to 4.10%.
All banks predict future cuts, but there is variation in the timing, pace, and extent of these reductions. In response, fixed rates are already trending below the variable rate - baking in a likely future rate cut.
Common questions about fixed vs variable loans
Can I switch from variable to fixed (or vice versa)?
Yes, most lenders allow you to switch from variable to fixed by requesting a loan variation. Switching from fixed to variable before the fixed term ends will usually incur break costs.
What happens at the end of my fixed rate period?
Unless you make alternate arrangements, your loan will automatically revert to the lender's variable rate. This is a good time to reassess your options and potentially refinance.
How are fixed rates determined?
Fixed rates reflect lenders' predictions about future interest rate movements and their costs of securing funding for that period. They're not directly tied to the Reserve Bank's cash rate.
Can I have an offset account with a fixed loan?
Some lenders offer offset accounts with fixed loans, but this feature is more commonly available with variable loans. If this feature is important to you, check with specific lenders.
How high can break costs get on fixed loans?
Break costs can vary significantly—from hundreds to many thousands of dollars—depending on:
- How long is left in your fixed term
- How much interest rates have changed since you fixed
- Your loan amount
The larger your loan and the further interest rates have fallen since you fixed, the higher your break costs could be.
Making your decision
Choosing between fixed and variable rates comes down to your personal circumstances, financial goals, and comfort with uncertainty. Remember:
- There's no universally "better" option—just what's better for your situation
- Your needs may change over time, so reassess periodically
- A split loan can offer a balanced approach if you're unsure
- We’re here to help you work through your goals
The Bottom Line
The fixed versus variable decision doesn't have to be stressful. By understanding the pros and cons of each option and considering your unique situation, you can make a choice that supports your financial goals while giving you peace of mind.
As mortgage brokers, we can help you assess your specific circumstances and find the loan structure that best suits your needs. Reach out to our team for personalised advice on finding the right balance for your home loan journey.
