Choosing between a fixed and variable rate is less about predicting the market and more about what you are comfortable with. A fixed rate gives you certain repayments for a set period. A variable rate gives you flexibility and the benefit of rate cuts, but your repayments can also rise. Many borrowers split the loan to get some of both.

What is a fixed rate?

Your interest rate is locked for a set term, usually one to five years. Your repayments stay the same for that period regardless of what the Reserve Bank does.

Good for: first home buyers getting used to a mortgage, families on tight budgets, and anyone who values knowing exactly what comes out each month.

Watch out for: limits on extra repayments, no or limited offset accounts, and break costs if you sell or refinance during the fixed term.

What is a variable rate?

Your rate moves with the market and your lender’s decisions. When rates fall, your repayments can drop. When they rise, so do your repayments.

Good for: people who want to make extra repayments, use an offset account, or may sell or refinance in the next few years.

Watch out for: less certainty, so you need room in your budget for rate rises.

What about a split loan?

You can fix part of your loan and leave the rest variable. For example, fixing 60% gives you certainty on most of the repayment, while the variable 40% keeps an offset account working and lets you make extra repayments. It is a common middle ground.

How do I decide?

Ask yourself:

• How much would a 1% rate rise hurt my budget?

• Do I plan to make extra repayments or use an offset account?

• Might I sell, move or refinance in the next two to three years?

• Would knowing my exact repayment help me sleep at night?

If certainty matters most, fixing (or fixing part) makes sense. If flexibility matters most, variable is usually better.

A typical Melbourne scenario

Chris and Mel have just bought their first home in Werribee with a $620,000 loan. Their budget is tight in the first couple of years while they furnish the house and Mel finishes her studies. They fix $400,000 for two years so most of their repayment is predictable, and keep $220,000 variable with an offset account where their savings sit. If rates fall, the variable part benefits. If rates rise, most of their loan is protected. When the fixed term ends, they review the whole loan again.

What happens when a fixed term ends?

Your loan usually rolls onto the lender’s standard variable rate, which is often higher than what new customers are offered. Put a reminder in your calendar a couple of months before your fixed term ends and review your options, including refinancing.

Are fixed rates cheaper right now?

Sometimes fixed rates are lower than variable rates, and sometimes higher. Lenders price fixed rates on where they think rates are heading, so a low fixed rate today is the bank’s own bet. Don’t fix only because the number looks lower this month. Fix because the certainty suits your budget, and compare the whole package, including fees, offset and extra repayment rules.

Key takeaways

• Fixed rates give certainty; variable rates give flexibility.

• A split loan can give you some of both.

• Check extra repayment limits, offset access and break costs before fixing.

• Review your loan before any fixed term ends.

Compare options with our loan comparison calculator and repayment calculator, read how to protect yourself from interest rate rises, or talk to our mortgage brokers about refinancing.

General information only. This article does not take into account your objectives, financial situation or needs, so consider whether it is appropriate for you and seek personal advice before acting. Elephant Financial Pty Ltd trading as Elephant Advisory is an authorised credit representative (ACR 487962) of Yellow Brick Road Aggregation Pty Ltd (formerly Vow Financial Pty Ltd) (ABN 66 138 789 161), Australian Credit Licence 390261.