Fixed rate home loans vs variable rate home loans: Which is right for you?

Definition: A fixed rate mortgage means the interest paid stays the same for the period locked in, which can be anywhere from a year to five years. A variable rate home loan means your repayments can fluctuate if there are rate changes, up or down.

Importance: A fixed rate offers certainty in what your repayments will be for a set period of time, but those loan arrangements can be rigid. If you want to sell or refinance, a fixed rate deal can be costly to get out of. A variable rate means you will benefit from rate reductions and can refinance or discharge a mortgage if you wish. But if interest rates rise, you’ll pay extra too. There are pros and cons to each.

Key differences: A fixed interest rate is lower than the market’s variable interest rate when you lock it in. A variable rate can go up or down when the official cash rate does – or when banks decide to hike costs.

Fixed rate home loans can be a popular choice for many borrowers because of the benefits on offer. They are:

Financial certainty: Amidst this cost-of-living crunch, knowing exactly what your mortgage repayments are going to be each month for the next few years could be very appealing. By locking in, you can essentially set and forget your home loan, safe in the knowledge that what you need to pay won’t change. These days, it might be one of the few costs in your household budget that doesn’t rise.

Avoiding rate rises: If you had locked in your rate before the Reserve Bank began hiking the cash rate, you’d probably be paying a few thousand dollars less in repayments each month than those on a variable rate. That’s the great benefit of a fixed rate – any increases won’t affect you. If you anticipate rate increases in the period you’re fixing for, you’ll save money on future repayments.

Paying less: If rates stay steady, as they have done for some time now, then you’ll have locked in a lower rate than is on offer for variable customers. Those benefits will be enjoyed for as long as the gap between fixed and variable rates remains.

As with most things in life, there are some downsides to fixing your mortgage interest rate. These are a few:

Missing rate cuts: Many economists currently expect the RBA to begin slashing interest rates at some point next year. Some of the big four banks believe the first cut could occur as early as February. When rates begin coming down, those who’ve fixed won’t enjoy those reductions in their repayments. They’re locked in, so if the variable rate falls below what they’ve committed to, the cost difference could be hefty.

Fixed rate home loans tend to come with far fewer bells and whistles. Want to have the ability to redraw on your loan in the future? It’s unlikely your mortgage will come with that feature. Like the idea of linking an offset account to your home loan, to lower the interest payable? Most fixed rate arrangements don’t allow it. 

Life changes. Sometimes the best-laid plans encounter hurdles and we need to make big decisions in a hurry. Fixed rate home loans are incredibly rigid and making a change can come with some steep costs. Say you want to refinance for whatever reason, your fixed rate lender will likely charge you a significant discharge fee. The same goes for if you want to sell the property and clear the loan. The bank is offering you a rate that won’t change and is lower than what they could get for a variable home loan. In return, you’re locked in – unless you’re willing to pay to exit.

A fixed rate home loan does not offer you an offset account (generally), nor redraw or the ability to make extra repayments and this loss of flexibility for some people and in some cases can cost more than the actual fixed rate savings.

PRO TIP – this is where “splitting” your mortgage into part fixed and part variable can reap the rewards of both sides!

Most borrowers opt to go with a variable rate home loan when they purchase property. These are some of the benefits that appeal:

Taking advantage of cuts: Let’s say the Reserve Bank does start cutting the official cash rate next year. All of those mortgage holders on a variable rate will see their repayments fall as a result. Banks overwhelmingly move with the increases or decreases of the RBA. If you’re fixed your rate won’t change. If you’re variable, it will fall and what you pay each month will too.

The ability to refinance: The mortgage market is incredibly competitive at the moment, and they will likely remain the case throughout 2025. Lenders often entice new customers with special deals, from discounted interest rates to no-fee offers and even cash back incentives. On top of that, long-term mortgage holders tend to see the variable rate they’re paying and the rate on offer to new customers at other banks widen and widen over time. If you want to refinance your home loan to take advantage of either, or for whatever reason, being on a variable rate arrangement makes this fairly straightforward. If you’re fixed, jumping ship can be a costly exercise.

Ultimate flexibility: Borrowers on a variable rate have many more options to take advantage of. They can make additional repayments to pay down their balance faster, without attracting any penalties. They can change the payment frequency without altering the terms of the arrangement, which could attract costs for fixed rate borrowers. They can also take advantage of potentially beneficial features of their variable home loans, like an offset facility, which can reduce the interest paid even further. And they can possibly redraw in instances where they need access to cash fast.

There are downsides to opting for a variable interest rate that are important to consider. Here are some:

Rising interest rates: Just ask someone who’s been on a variable rate since the RBA began its painful hiking cycle what the experience has been like. They’re likely paying thousands more in repayments than someone who fixed at that point in time. A variable rate means you’re open to higher costs if interest rates rise. And it’s not just the cash rate that determines if a lender increases its variable rate. There are a whole host of factors at play, from the economy to industry competitiveness and global money markets.

Less certainty: Just like a fixed rate gives households surety over what their outgoings will be each month, a variable rate means that figure could shift over time. When the cost of living is high, this uncertainty might add unwanted pressure to your financial affairs. Interest rates can change at any time and for multiple reasons. You might not be able to guarantee your repayments stay stable in the long-term.

Unnecessary fees: Variable home loans often come with a range of features, but not all borrowers make use of them. If that’s the case, they’re likely paying for those perks via ongoing fees, meaning they’re forking out money for something they don’t use.

Speak with us to decide whether a fixed rate home loan or a variable home loan is right for you.