Learn the pros, cons, fees and flexibility of each loan type to choose the best mortgage option for your budget.
Choosing between a fixed-rate and variable-rate mortgage is one of many important decisions you will need to make when taking out a home loan. Both offer advantages and disadvantages that can significantly impact your monthly budget, financial stability and peace of mind.
A variable-rate mortgage has an interest rate that your lender can move up or down at any time. Often, this is done in tandem with movements in the cash rate (which is set by the Reserve Bank of Australia), along with other economic factors.
A fixed-rate loan locks in an interest rate for a limited period (often one to five years). During the application stage, borrowers can also utilise a rate lock to protect their agreed rate before settlement.
Let’s compare the two:
Feature / Aspect | Variable-rate home loan | Fixed-rate home loan |
Interest rate behavior | Fluctuates based on RBA cash rate changes and lender decisions. Variable rates are often lower over the long-term than fixed rates. | Locked in for a set period (typically 1 to 5 years). The average fixed rate may be higher than the average variable rate. |
Repayment Certainty | Low – unpredictable rate changes can make it hard to budget. | High – you know exactly what your repayments will be for the entire fixed term. |
Rate Drop Benefits | Pro: Your interest rate could fall if the cash rate decreases. | Con: You won’t benefit from lower repayments if interest rates fall. |
Protection Against Rate Hikes | Con: Your interest rate could rise if the cash rate increases, which means you could end up paying a lot more interest than if you had a fixed-rate loan. | Pro: You won’t need to worry about sudden rate hikes during the entire term of the mortgage. |
Extra Repayments | Pro: You can usually make extra repayments without incurring penalty fees. | Con: You may not be able to make extra repayments on your loan. |
Features | Pro: You may have access to offset accounts and redraw facilities. | Con: You may not have access to offset accounts and redraw facilities. |
Refinancing Flexibility | Pro: Switch lenders or loan products anytime without break fees. | Con: You may incur fees if you refinance while the fixed-rate period is still in place. |
Post-Term Risk | N/A (ongoing rate). | Con: You could face a significant hike when your interest rate reverts to variable at the end of your fixed-rate period. |
Best Suited For | Borrowers seeking maximum flexibility, loan features and extra payment capacity. | Borrowers needing strict monthly budget certainty and rate-hike protection. |
Opting for a variable-rate mortgage could be a smart choice if you expect interest rates to trend down over the next few years. On the other hand, a fixed-rate mortgage could be a smart choice if you want budgetary certainty or you expect interest rates to trend up over the next few years.
A split loan is a mortgage separated into two portions, one with a fixed interest rate and the other a variable rate. This option could be a smart choice for borrowers who want the best of both worlds – the security of fixed rates with the flexibility of variable rates.
Use this split loan calculator to see how much your home loan repayments will be if you choose to split your loan between a fixed and variable rate.
Deciding between a fixed, variable or split rate isn’t just about picking an interest rate. It’s about matching your mortgage structure to your career, lifestyle and financial plans.
Yes, but switching or breaking a fixed-rate contract early may result in break fees charged by the lender. These fees depend on current wholesale interest rates and how much time remains on your fixed term.
When your fixed term ends, your loan automatically rolls over to the lender’s standard variable rate. You can choose to accept the revert rate, negotiate a lower variable rate, re-fix for another period, or refinance with another lender.
Most Australian lenders do not offer offset accounts on fixed-rate loans. However, a select group of lenders offer partial offset facilities on fixed rates, or you can use a split loan to link an offset account to the variable portion.
Not necessarily. Fixed rates reflect economic forecasts for future interest rates. If lenders expect cash rates to fall, fixed rates may be lower than current variable rates. Conversely, if lenders expect rates to rise, fixed rates are typically priced higher.
Book a chat with a Loan Market broker for personalised advice.
