Fixed vs Variable Home Loan Rates
The real trade offs between fixed and variable home loan rates, and how to work out which suits you, explained simply by an Adelaide mortgage broker.
Choosing between a fixed and a variable rate is one of the first decisions every borrower faces, and there is no single right answer. A fixed rate gives you certainty by locking your rate for a set period. A variable rate moves with the market and usually comes with more flexibility. Many borrowers split the difference and take some of each. The best choice is the one that fits your budget, your plans and how much you value predictability over flexibility, not whatever looks cheapest on the day.
What a fixed rate gives you
A fixed rate locks your interest rate, and therefore your repayments, for a set term, often one to five years. That gives you certainty and protection if rates rise. The trade off is less flexibility.
- Certainty: your repayment does not change during the fixed term.
- Protection if interest rates rise.
- Often a cap on how much extra you can repay.
- May not include a full offset account.
- Break costs can apply if you exit early.
What a variable rate gives you
A variable rate moves up and down with the market, so your repayments can change. In return you usually get more flexibility, and the freedom to pay your loan down faster.
- Flexibility to make unlimited extra repayments.
- Access to an offset account and redraw.
- You benefit if rates fall.
- Your repayments rise if rates increase.
- Generally no break costs to refinance or exit.
Splitting the loan to get both
You do not always have to choose one or the other. A split loan fixes part of your balance and leaves the rest variable, so you get some certainty on repayments and some flexibility to pay extra or use an offset. Many borrowers find a split a sensible middle ground when they cannot decide, and the ratio can be tailored to how much certainty you want.
What break costs are, and why they matter
Break costs are a fee a lender can charge if you exit or change a fixed loan before the term ends. They are based on movements in wholesale interest rates, so they can be small or surprisingly large. This is the single biggest reason not to fix if there is a real chance you will sell, refinance or make large extra repayments during the term.
How offset and redraw fit in
An offset account is a transaction account linked to your loan, where every dollar sitting in it reduces the interest you are charged, while staying available to you. Redraw lets you pull back extra repayments you have made. These features are a core reason many borrowers favour variable, since fixed loans often restrict or exclude them.
How to actually choose
If a stable repayment is important to your budget, or you are stretched and a rate rise would hurt, certainty may be worth more to you. If you plan to make extra repayments, use an offset, or may sell or refinance soon, flexibility usually wins. A split can hedge both. Your own situation, not a rate forecast, should drive the decision, because no one reliably predicts where rates go next.
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Fixed vs Variable: common questions
What is the difference between fixed and variable rates?
A fixed rate locks your interest rate and repayments for a set period, usually one to five years. A variable rate moves up or down over time with the market, so your repayments can change. Each has clear trade offs.
Is a fixed or variable rate better right now?
There is no single right answer, it depends on your situation and your view on where rates are heading, which nobody can predict reliably. Many borrowers split the loan to get some of both.
How does a fixed rate home loan work?
You agree to a set interest rate for a fixed term, often one to five years. Your repayments stay the same for that period regardless of market moves. At the end of the term the loan reverts to a variable rate unless you refix.
How does a variable rate home loan work?
Your interest rate can move up or down over time, largely in line with the market and the Reserve Bank cash rate. When the rate changes, your repayment usually changes too. Variable loans typically offer offset accounts and free extra repayments.
What is a split loan and should I use one?
A split loan divides your mortgage into two parts, one fixed and one variable. You get repayment certainty on the fixed portion and flexibility, like an offset, on the variable portion. It is a common way to hedge the rate decision.
What are break costs on a fixed rate?
Break costs are fees a lender charges if you exit a fixed rate early, for example by refinancing, selling, or repaying ahead of schedule. They are based on how wholesale rates have moved since you fixed, so they can vary a lot.
Can I have an offset account on a fixed rate?
Usually only partly, if at all. Most lenders reserve full offset accounts for variable loans. Some offer a limited or partial offset on fixed loans, but it is far less common, which is one reason borrowers split their loan.
Can I make extra repayments on a fixed loan?
Usually only up to a capped amount each year, if at all. Fixed loans typically limit extra repayments, and going over the cap can trigger fees. Variable loans generally allow unlimited extra repayments.
What happens when my fixed rate ends?
Your loan usually reverts to the lender standard variable rate, which is often higher than sharp market rates. This is the moment to review, refix, or refinance, rather than letting it roll onto the revert rate by default.
Can I fix only part of my loan?
Yes, that is exactly what a split loan does. You fix one portion for repayment certainty and leave the rest variable for flexibility and offset benefits. You choose the ratio that suits you.
What is a rate lock and is it worth it?
A rate lock holds a fixed rate for you between application and settlement, for a fee, so you are protected if fixed rates rise before your loan settles. Whether it is worth it depends on the fee and how rates are moving.
How long should I fix my rate for?
It depends on how long you want certainty and your plans for the property. Shorter fixed terms give less exposure to break costs and more flexibility; longer terms give more certainty but lock you in for longer.
How does the RBA cash rate affect variable rates?
The Reserve Bank sets the cash rate, which strongly influences lenders variable rates, though lenders set their own rates and do not always move in lockstep. When the cash rate changes, variable repayments often follow.
Can I refinance while on a fixed rate?
Yes, but you may face break costs for exiting the fixed term early. Whether refinancing still makes sense depends on the size of those costs against the savings, so it is worth getting the break figure before deciding.
What is a revert rate and why does it matter?
The revert rate is the rate your loan rolls onto when a fixed term or introductory rate ends, usually the lender standard variable rate. It is often higher than competitive rates, so it matters because it can quietly raise your repayments.
Is a fixed or variable rate cheaper?
It varies with the market and the lender, and the cheaper headline rate is not always the cheaper choice once features and flexibility are counted. The right comparison is total cost and fit for your plans, not the rate alone.
Can I make extra repayments on a fixed loan?
Often only up to a limit. Many fixed loans cap how much extra you can repay each year, and exceeding it can trigger fees. Variable loans usually allow unlimited extra repayments.
What happens when my fixed term ends?
Your loan usually rolls to the lender standard variable rate, which can be higher than what you were paying. The end of a fixed term is a natural prompt to review your loan and possibly refinance.
What is a split loan?
A split loan fixes part of your balance and keeps the rest variable, giving you a mix of certainty and flexibility. You choose the ratio based on how much repayment certainty you want.
Should I fix my rate to be safe?
Fixing gives certainty, but it is not risk free, because break costs apply if your plans change and you exit early. It suits borrowers who value a steady repayment and do not expect to sell, refinance or repay large amounts during the term.
General information only. This page provides general information about home loans and is not financial or credit advice, a quote, or a guarantee, and your personal circumstances have not been considered. Lending policies, interest rates, fees and eligibility vary by lender and change over time. Always confirm your own situation with a licensed mortgage broker or lender before acting. Ross McFarlane (Credit Representative 526725) is an authorised Credit Representative of Australian Associated Advisers Pty Ltd t/a Keylend, Australian Credit Licence 392169.