Fixed vs Variable Home Loan — Which Is Right for You?
Fixed or variable — or a split of both? This is one of the most common questions for Australian mortgage holders. Neither is universally better: the right answer depends on your cash flow needs, risk tolerance, and what you think rates will do — which no one reliably predicts.
How variable rate loans work
A variable rate loan moves with market conditions — primarily correlated with the RBA cash rate, though lenders have discretion on how much and how quickly they pass changes on. When the RBA raises rates, variable borrowers typically see an increase within weeks. When rates fall, repayments fall automatically.
Key advantages: full offset account access (100% offset against loan balance, saving interest daily), unlimited extra repayments, and no break costs if you refinance or sell. The flexibility is the value proposition — you can respond to changing circumstances without penalty.
How fixed rate loans work
A fixed rate loan locks your interest rate for a set term — typically 1, 2, 3, or 5 years. During that period, your repayment does not change regardless of what the RBA does. At the end of the fixed term, the loan rolls to a variable rate (or you can refix at the rate available at the time).
The tradeoff: certainty in exchange for flexibility. Fixed loans typically do not offer full offset accounts, restrict extra repayments, and charge significant break costs if you exit early.
Side-by-side comparison
| Feature | Variable | Fixed |
|---|---|---|
| Rate | Moves with market | Locked for 1–5 years |
| Repayment certainty | No | Yes |
| Extra repayments | Unlimited | Capped or restricted |
| Offset account | Full 100% | Rare or not available |
| Break costs | None | Yes — can be substantial |
| Refinance ease | Easy — no penalties | Complex / expensive during term |
| Best suits | Rate-active borrowers, offset account users, extra repayment makers | Budget-focused households, those needing certainty, lower risk tolerance |
Why break costs matter — a worked example
Most borrowers do not understand why breaking a fixed loan is so expensive. The calculation is based on the lender's loss — not a penalty in the traditional sense. Here is how it works:
In this example, breaking to save 1% on the remaining 18 months would save approximately $8,775 in interest — but cost approximately $8,775 in break costs. The refinance would need to be justified by a larger rate difference, or the lender's quoted rate savings would need to materially exceed this threshold over the remaining and future period.
Break costs are calculated by lenders using wholesale rates (not retail rates), and the formula varies by lender. Your actual break cost must be obtained directly from your lender before breaking a fixed loan. This example is indicative only. Breaking a fixed loan to get a lower rate can cost more than the interest saving — especially in the early years of the fixed term.
The split loan option
A split loan divides your mortgage into two portions — one fixed, one variable. A common split is 50/50: fix half for repayment certainty, keep half variable for offset account access and flexibility.
This approach gives partial protection if rates rise (the fixed portion is shielded) while maintaining the ability to park savings in an offset account on the variable portion. You can also make unlimited extra repayments on the variable portion.
Split loans involve no additional setup cost beyond normal application and are offered by most major Australian lenders. The split ratio can be adjusted at application based on your needs — some borrowers do 70/30 or 30/70 depending on their priorities.
How to decide
A note on rate forecasting
No one reliably predicts RBA rate movements. In 2020–2021, many borrowers fixed at near-zero rates just before the RBA began its historic tightening cycle — this worked out very well. In 2022–2023, borrowers who fixed near the top of the cycle locked in expensive rates just before the market peaked.
The decision should be made based on what your household can manage and what outcome you're insuring against — not on your prediction of what the RBA will do. Use the Mortgage Repayment Calculator to model your repayments at different rates and see where your comfort zone sits.