Fixed vs Variable Home Loans

When choosing a home loan, one of the biggest decisions is whether to choose a fixed interest rate, a variable interest rate, or a split loan that combines both.

There is no single best option for everyone. The right structure depends on your budget, risk tolerance, need for flexibility, future plans and how comfortable you are with interest-rate changes.

What is a fixed-rate home loan?

A fixed-rate home loan has an interest rate that stays the same for an agreed period, such as one, two, three or five years.

During the fixed period, your repayments usually stay the same. This can make budgeting easier because you know what your required repayments will be.

At the end of the fixed term, the loan may revert to a variable rate unless you negotiate a new fixed rate or refinance.

Potential benefits of a fixed-rate loan

Repayment certainty. The biggest advantage is certainty. If interest rates rise during your fixed term, your fixed repayments are usually protected until the fixed period ends. This can help households plan their cash flow.

Budgeting confidence. Fixed repayments can be useful for first home buyers, families, investors or anyone who wants more predictable monthly expenses.

Protection from short-term rate increases. If rates rise after you fix, you may pay less than borrowers on variable rates for that period.

Potential drawbacks of a fixed-rate loan

Less flexibility. Fixed loans may have limits on extra repayments. Some may not allow a full offset account. Others may allow only partial features.

Break costs. If you sell, refinance or repay the loan early during the fixed term, break costs may apply. These can vary and may be significant depending on market conditions and lender rules.

You may miss out if rates fall. If variable rates fall after you fix, you may not benefit until the fixed term ends.

What is a variable-rate home loan?

A variable-rate home loan has an interest rate that can move up or down over time.

Your lender may change the rate in response to market conditions, funding costs, competition, Reserve Bank decisions or its own pricing policies.

Potential benefits of a variable-rate loan

Flexibility. Variable loans often offer more flexible features, such as extra repayments, redraw facilities and offset accounts.

Access to offset or redraw. Many borrowers choose variable loans because they want to reduce interest using an offset account or access extra repayments through redraw.

Benefit from rate cuts. If your lender reduces variable rates, your repayments may fall, depending on your loan structure.

Potential drawbacks of a variable-rate loan

Repayment uncertainty. If interest rates rise, your repayments may increase. This can put pressure on household cash flow.

Harder to budget. Because repayments can change, some borrowers find variable loans less predictable.

Rate changes are not always simple. A lender's variable rate may not move exactly in line with the Reserve Bank cash rate. Lenders make their own pricing decisions.

What is a split loan?

A split loan divides your mortgage into fixed and variable portions.

For example, a borrower may fix 60% of the loan and keep 40% variable.

This can provide a balance between certainty and flexibility.

The fixed portion gives some repayment stability, while the variable portion may allow offset, redraw or extra repayment features.

A simple example

Imagine a borrower has a $700,000 home loan.

They might choose:

Option 1: 100% fixed. This gives more certainty but may reduce flexibility.

Option 2: 100% variable. This gives more flexibility but repayments can change.

Option 3: 60% fixed and 40% variable. This gives partial certainty while keeping some flexibility.

The right choice depends on the borrower's circumstances and comfort with risk.

How fixed and variable rates affect repayments

The interest rate has a major effect on mortgage repayments.

A higher interest rate usually increases repayments. A lower interest rate usually reduces repayments.

You can use the PurchaseWise Mortgage Repayment Calculator to test different interest rates, loan amounts and loan terms.

Questions to ask before choosing

Before choosing fixed, variable or split, consider:

• How important is repayment certainty?
• Would I be comfortable if repayments increased?
• Do I plan to sell or refinance soon?
• Do I want to make extra repayments?
• Do I need an offset account?
• Could break costs affect me?
• Would a split loan give me a better balance?
• What does my broker or lender recommend for my situation?

Common mistakes to avoid

Mistake 1: Choosing based only on the lowest advertised rate. The lowest rate is not always the best loan. Features, fees, flexibility and conditions matter.

Mistake 2: Fixing without understanding break costs. If your plans change, a fixed loan can be expensive to exit early.

Mistake 3: Ignoring offset and redraw features. A slightly higher rate with useful features may be better for some borrowers than a lower rate with fewer options.

Mistake 4: Assuming rates will move in one direction. No one can predict future interest rates with certainty. Build in a margin of safety.

Fixed vs variable for investors

Property investors may think differently from owner-occupiers.

An investor may value certainty for rental cash flow, or they may prefer flexibility if they plan to refinance, access equity or restructure loans.

Tax treatment can also differ depending on personal circumstances, so investors should speak with an accountant or adviser.

Final thoughts

Fixed and variable home loans each have strengths and weaknesses.

A fixed rate may suit borrowers who want certainty. A variable rate may suit borrowers who want flexibility. A split loan may suit borrowers who want a combination of both.

Before choosing, compare the total loan structure, not just the headline rate.

Related guides

• Offset Account vs Redraw Facility
• How Interest Rate Changes Affect Repayments
• How Mortgage Repayments Are Calculated

Important disclaimer

This guide is general information only and does not consider your personal situation. It is not financial, credit, legal or tax advice. Speak with a lender, mortgage broker or qualified adviser before choosing a loan.