Fixed vs Variable Home Loan Rates: What Actually Suits You

It's the first major decision on almost every mortgage, and it shapes years of repayments, yet a lot of buyers pick based on gut feeling rather than actually weighing it up. Here's the real trade-off.

Getting it wrong is rarely dramatic on the day you sign. It shows up later, as a break cost when you sell earlier than planned, or as a repayment that jumps while your budget stays put. On a loan that runs for decades, that's an expensive thing to decide in the last five minutes of an application.

What you're actually choosing between

Strip the jargon out and this is a question about certainty. A fixed rate buys a repayment that can't move for a set period. A variable rate leaves it exposed to the market in both directions. That's the whole trade.

It also helps to remember that the fixed rate you're offered isn't a favour. Lenders price fixed rates off what they expect funding to cost over that period, so a fixed rate below the variable rate is a view about where things are heading, not a discount someone forgot to withdraw. There's no safe side of that. The useful question isn't which is cheaper, because nobody knows yet. It's which outcome you could absorb: a rise you didn't plan for, or a break cost you didn't plan for.

Fixed rate home loans

Your rate is locked in for a set period (commonly 1-5 years), regardless of what happens in the broader market during that time.

What's locked is the rate, not the whole contract. Fees can still change, and a fixed loan usually carries fewer features than the variable equivalent.

Pros:

• Complete repayment certainty for the fixed period. Genuinely useful for budgeting
• Protection if rates rise while you're locked in
• Peace of mind if you're stretched close to your borrowing limit and can't absorb a rate rise

Cons:

• If rates fall, you don't benefit until your fixed term ends
• Break fees can be significant if you need to refinance, sell, or make large extra repayments during the fixed period
• Extra repayment limits are common on fixed loans. Worth checking before you assume you can pay it down faster

The break cost is the part people underestimate. It isn't a flat administration fee. It's the lender recovering its loss on funding arranged for a term you didn't end up serving, so it depends on how rates have moved since you fixed and how much term is left. It can be large or close to nothing, and you can't know which in advance. It also follows you into a refinance, so a sharper rate elsewhere has to beat the break cost and the exit fees.

What happens when the fixed term ends?

The loan usually reverts to the lender's standard variable rate, which is often not the sharpest variable rate the same lender offers new customers. Nothing goes wrong. Your repayment simply resets to a number you didn't choose. Diary the expiry date with a reminder a couple of months out, because that's the window to refix, ask for a reprice or look at refinancing calmly.

Variable rate home loans

Your rate moves with the market for the life of the loan.

Worth being precise about "moves with the market". Your lender sets your variable rate. Cash rate movements influence that decision heavily, but lenders don't always pass a change on in full, or immediately. It's a decision, not a number that arrives automatically.

Pros:

• Benefit immediately if rates fall
• Generally more flexibility. Extra repayments, redraw, and offset accounts are more commonly available on variable loans
• No break fees if your circumstances change and you need to refinance or sell

Cons:

• Repayments can rise if rates move upward, which needs to be budgeted for as a real possibility, not a remote one
• Harder to plan around with total certainty over a long period

Offset and redraw are not the same thing

People use the words interchangeably and it causes problems later. An offset account is a transaction account linked to your loan. Its balance is offset against your loan balance when interest is calculated, and the money stays yours in an ordinary account. Redraw is money you've already paid onto the loan above your required repayments, which the lender may let you take back, at its discretion under the contract and sometimes with limits or fees.

The distinction matters most if the property is or might become an investment, because money coming back out of a loan can be treated as new borrowing and what you spend it on affects the tax treatment. Ask your accountant first, not after.

Split loans: doing both

A lot of lenders let you split your mortgage (part fixed, part variable) so you get some certainty and some flexibility in the one loan. This is worth considering if neither option feels like a clean fit on its own, rather than treating it as an all-or-nothing choice.

How do you decide the split?

Mechanically it's two loan accounts against the one property, each with its own rate and features. One approach is to work out the portion of the repayment you couldn't absorb a rise on and fix around that, leaving the rest variable so the offset and extra repayments have something to work against. Offset generally only operates against the variable portion, so a split that fixes almost everything can switch off the feature you were relying on. And the fixed portion still carries break costs. You've reduced the problem, not removed it.

What actually determines the right call for you

• How much buffer do you have if rates rise? If a rate increase would genuinely strain your budget, fixing some or all of the loan buys certainty worth having.
• How likely are you to need flexibility (extra repayments, refinancing, selling) during the period you're considering fixing?
• What's the actual gap between the fixed and variable rates on offer right now? Sometimes it's negligible, sometimes it's significant. Worth comparing the real numbers rather than assuming based on general market sentiment.

What a lender looks at before offering you either

The fixed or variable question comes after the bigger one: how much a lender will lend you at all.

• Your income, its type, and how long you've been earning it
• Your regular living expenses, assessed properly rather than taken as a round guess
• Existing debts, with credit card limits usually counted rather than balances
• Your deposit, where it came from and how long it has been sitting there
• Your LVR, which is the loan as a percentage of the property's value
• Whether lenders mortgage insurance applies at that LVR
• Your credit file, including repayment history and recent enquiries
• The property itself, including its type, location and valuation

Two of those are worth expanding. Lenders don't assess you at the rate you'd actually pay. They add a margin on top and test whether you could still meet the repayment at that higher rate, which is why an approval usually lands below what a repayment calculator suggests. That buffer comes from regulatory guidance and lender policy and it changes over time, so ask what's being applied when you apply.

The other is lenders mortgage insurance. Above a certain LVR, commonly 80%, most lenders require LMI. It's a one-off premium that protects the lender if the loan is sold up at a loss, not you, and it's usually paid at settlement or added to the loan. The cost moves with the loan size and the LVR, so get the figure in writing for your own numbers.

An illustration of what certainty costs

The numbers here are invented, deliberately round and illustrative only. They aren't a rate or a repayment available anywhere. Say your variable repayment is $3,600 a month. A move big enough to add $200 a month takes you to $3,800, which is $2,400 across a year. If fixing costs $50 a month more than variable today, fixing for two years costs $1,200 in extra repayments. In that invented scenario, fixing pays for itself if rates rise early in the term and costs you if they don't move or they fall.

Run that arithmetic on your own numbers. It won't tell you what rates will do. It tells you what the certainty costs in dollars a month, which is far easier to have an opinion about than a decimal point.

Where people get caught out

Can you pay a fixed loan down faster?

Sometimes, but usually only up to a cap. Many fixed loans allow extra repayments to an annual limit and charge a break cost above it. If your plan involves throwing a bonus at the mortgage, check the limit before you fix.

Does an offset account work against a fixed loan?

Often not, or only partially, and it varies by lender. Some offer no offset on a fixed loan, some a partial one, some a full one on a package. If your plan involves parking savings in an offset, confirm it applies to the fixed portion.

Is the rate you're quoted the rate you get?

Not automatically. On fixed loans the rate is commonly set at settlement or drawdown rather than at application, so if it moves in between, the later one is yours. Many lenders offer a rate lock for a fee. Ask whether it's available, what it costs and when it has to be requested.

This is also where pre-approval and formal approval part ways. Pre-approval is a conditional indication of what a lender would likely lend, often before everything has been verified and with no property attached. Formal approval is the unconditional offer on a particular property, after the valuation and full verification. Pre-approval is useful for knowing your range. It isn't a commitment and it isn't a locked rate.

What to have ready before you compare

Most of the delay in a home loan application is waiting on documents that were always going to be needed.

• Recent payslips, or two years of returns and financials if you're self employed
• Bank statements for your everyday accounts covering the last few months
• Every debt with its limit, balance and repayment, including buy now pay later accounts
• An honest living expenses figure, built from your statements rather than estimated
• Evidence of your deposit and where it came from, including any gift or sale proceeds
• The contract of sale or property details, if you have a specific property in mind
• A copy of your own credit report, so nothing in the assessment is a surprise
• Your best answer on the next few years: selling, renovating, a change of income, a period on one wage

That last one does more work than the rest here. Break cost risk is really a question about how confident you are in your own plans.

The short version

Fixing buys certainty and charges you for flexibility. Variable keeps the flexibility and charges you for uncertainty. A split pays a bit of each. What tips it is usually your buffer and your plans, not a forecast.

There's no universally correct answer. It depends on your risk tolerance, your buffer, and how much you value certainty versus flexibility. Compare City runs both fixed and variable (and split) options across our panel so you can see the real numbers before locking anything in.

More on home loans and refinancing.