Choosing between a fixed and variable mortgage is one of the biggest money decisions many Australians make. Here’s how each works, and the trade-offs between certainty and flexibility.
Most Australian home loans come in two types: variable or fixed. Each works differently, and suits different borrowers.
Variable rates
A variable interest rate can change at any time. Lenders usually adjust them after the Reserve Bank changes the cash rate, although they don’t always pass on the full change, and can move rates independently.
That means repayments rise when rates go up and fall when they come down.
Variable loans tend to be more flexible. Borrowers can usually make extra repayments without penalty, redraw money they’ve paid ahead, and link an offset account. An offset account is a transaction or savings account whose balance is subtracted from the loan when interest is calculated, cutting the interest bill.
Variable loans can also be refinanced to another lender without large fees, which matters if a better deal comes along.
Fixed rates
A fixed rate is locked in for a set period, usually between one and five years. Repayments stay the same during that time, no matter what happens to the cash rate.
That certainty makes budgeting easier, and protects borrowers if rates rise. But if rates fall, they won’t benefit until the fixed period ends.
Fixed loans often come with limits, such as caps on extra repayments and fewer offset options. Breaking a fixed loan early, for example by selling the home or refinancing, can trigger break costs, which can run into thousands of dollars if rates have fallen since the loan was fixed.
When the fixed period ends, the loan usually switches to the lender’s standard variable rate, which may be higher than rates offered to new customers. That’s known as a “fixed-rate cliff”, and borrowers are usually better off reviewing their options before it arrives.
Splitting the difference
Many borrowers choose a split loan, fixing part of the mortgage and leaving the rest variable. That provides some certainty while keeping access to an offset account and extra repayments on the variable portion.
Fixed rates are set by lenders based on where they expect interest rates to go, so when markets expect the RBA to raise rates, fixed rates tend to climb before the cash rate does.
There’s no right answer for everyone. It depends on a borrower’s budget, how long they plan to keep the property and how much certainty they need. A mortgage broker or financial adviser can help compare options.
