Fixed vs Variable Home Loan Rates Australia: Pros, Cons and Split Loans
Fixed vs Variable Home Loan Rates
Choosing between a fixed, variable or split home loan is not simply about predicting whether interest rates will rise or fall.
The right structure depends on your budget, need for repayment certainty, plans to make extra repayments, preferred loan features and whether you may sell, refinance or change the loan during the fixed-rate period.
Fixed vs Variable Home Loan Rates: Quick Answer
A fixed-rate home loan may suit borrowers who value predictable repayments for an agreed period.
A variable-rate home loan may suit borrowers who want greater flexibility, access to features and the ability to benefit if their lender reduces the rate.
A split home loan combines both structures by fixing one portion of the loan and keeping the remaining portion variable.
There is no single option that is best for every borrower.
Fixed, Variable and Split Home Loans Compared
| Loan Structure | Main Benefit | Main Risk |
|---|---|---|
| Fixed rate | More predictable repayments during the fixed period | Break costs and restrictions may apply |
| Variable rate | Greater flexibility and access to rate reductions | Repayments may increase |
| Split loan | Combines some repayment certainty with some flexibility | More complex to manage |
Moneysmart recommends comparing interest rates, fees, repayments and loan features together rather than choosing a loan based only on the advertised rate.
What Is a Fixed-Rate Home Loan?
A fixed-rate home loan has an interest rate that remains unchanged for an agreed period.
At the end of the fixed period, the loan will generally move to a variable rate unless you arrange another fixed term or refinance.
Potential Benefits of a Fixed Rate
- Repayments are easier to predict during the fixed period
- Interest-rate increases will not affect the fixed portion
- Greater certainty may make household budgeting easier
- It may suit borrowers concerned about repayment increases
Potential Disadvantages of a Fixed Rate
- You generally will not benefit if variable rates fall
- Break costs may apply if you refinance, sell or change the loan early
- Extra repayments may be restricted
- Offset or redraw features may be unavailable or limited
- The rate available when the fixed period ends may be higher
Moneysmart warns that fixed-rate break fees can be substantial and that some fixed loans restrict additional repayments.
What Is a Variable-Rate Home Loan?
A variable home-loan rate can increase or decrease during the loan term.
The Reserve Bank of Australia’s cash rate influences mortgage rates, but lenders also consider funding costs, competition, loan characteristics and individual pricing decisions. A cash-rate change does not necessarily result in every lender changing rates by exactly the same amount.
Potential Benefits of a Variable Rate
- You may benefit if the lender reduces the rate
- Extra repayments are commonly available
- Refinancing or changing the loan may be easier
- Offset and redraw features may be available
- Greater flexibility may suit borrowers whose plans could change
Potential Disadvantages of a Variable Rate
- Repayments may increase
- Household budgeting may be less predictable
- Loan packages with additional features may charge higher rates or fees
- A borrower needs enough financial capacity to manage potential rate increases
What Is a Split Home Loan?
A split loan divides the mortgage into fixed and variable portions.
For example, a borrower might:
- Fix 50% and leave 50% variable
- Fix 70% and leave 30% variable
- Use another split based on their circumstances
The fixed portion provides some repayment certainty, while the variable portion may allow extra repayments, offset features and access to future rate reductions.
Only the variable portion will receive the full benefit if variable rates fall. Similarly, only the fixed portion is protected from variable-rate increases during the fixed term. Moneysmart identifies split loans as an option for borrowers wanting elements of both fixed and variable structures.
Fixed vs Variable Home Loan Features
Interest rate structure is only one part of choosing a home loan.
Also compare:
- Comparison rate
- Application and ongoing fees
- Offset-account availability
- Redraw rules
- Extra-repayment limits
- Fixed-rate break costs
- Loan term
- Repayment frequency
- Package fees
- Ability to split the loan
- Ability to refinance or sell
- What happens when the fixed period ends
A loan with a slightly lower interest rate may not provide better value if it has expensive fees or lacks features you would regularly use.
Offset Accounts and Redraw Facilities
An offset account is a transaction account linked to a home loan. The balance in the offset account reduces the loan amount used to calculate interest.
A redraw facility allows a borrower to access eligible extra repayments that have already been paid into the loan. Access rules depend on the lender and product.
Offset accounts and redraw facilities are not identical. They can also have different fees, access conditions and taxation implications. Moneysmart recommends checking whether the cost of an offset feature is justified by the balance you expect to keep in it.
Not every fixed-rate loan provides access to a full offset account or unrestricted redraw.
When Might a Fixed Rate Be Considered?
A fixed rate may be considered when a borrower:
- Values predictable repayments
- Has limited room in their budget for rate increases
- Does not expect to sell or refinance during the fixed period
- Does not plan to make substantial additional repayments
- Is comfortable giving up the benefit of possible variable-rate reductions
- Understands the break-cost and feature restrictions
Fixing a rate does not guarantee that the borrower will pay less overall. It primarily provides certainty for the agreed period.
When Might a Variable Rate Be Considered?
A variable rate may be considered when a borrower:
- Values flexibility
- Plans to make additional repayments
- Wants access to an offset or redraw facility
- May refinance, sell or restructure the loan
- Has enough budget flexibility to manage repayment increases
- Wants to benefit if the lender reduces the rate
Variable-rate borrowers should consider whether they could still afford their repayments if rates increased.
When Might a Split Loan Be Considered?
A split loan may be considered when a borrower wants:
- Some repayment certainty
- Some access to offset or redraw features
- The ability to make additional repayments on part of the loan
- Reduced exposure to movements in either direction
- A compromise between fixed and variable structures
The split percentage should be based on the borrower’s cash flow, savings, future plans and tolerance for changing repayments—not a prediction of exactly where rates will move.
Questions to Ask Before Choosing
Before deciding, consider:
- How important are predictable repayments?
- Could I afford a repayment increase?
- Do I plan to make substantial extra repayments?
- Will I keep savings in an offset account?
- Might I sell, refinance or move during the fixed term?
- Could my employment, family or financial position change?
- What break costs or restrictions apply?
- What rate will apply when the fixed period ends?
- Are the loan’s features worth any additional fees?
- Would splitting the loan better suit my needs?
What Happens When a Fixed Rate Ends?
When a fixed period expires, the loan commonly moves to the lender’s applicable variable rate unless another arrangement is made.
Before the fixed period ends, review:
- The lender’s proposed revert rate
- Expected repayments
- Other available fixed rates
- Variable-rate options
- Split-loan options
- Offset and redraw requirements
- Refinance costs
- Your future property plans
Do not wait until the final repayment under the fixed rate before reviewing the available options.
Common Fixed vs Variable Mistakes
Common mistakes include:
- Choosing solely based on a prediction about the RBA
- Ignoring fees and loan features
- Fixing the entire loan without considering extra-repayment plans
- Assuming every variable loan includes a full offset account
- Confusing redraw with an offset account
- Refinancing a fixed loan without checking break costs
- Choosing a longer loan term only to reduce repayments
- Paying for features that will not be used
- Failing to review the revert rate before a fixed term expires
- Treating a lower advertised rate as the lowest total-cost option
How a Mortgage Broker Can Help
A mortgage broker can help you:
- Review your current or proposed loan structure
- Compare fixed, variable and split options
- Compare rates, fees and features
- Explain fixed-rate restrictions
- Identify offset and redraw options
- Check lender policies
- Estimate repayments under different structures
- Assist with an application or refinance
- Review the options before a fixed period ends
Truth Group can compare potentially suitable options from more than 40 lenders.
The lender remains responsible for assessing the application and deciding whether the loan will be approved.
Frequently Asked Questions
Is a fixed rate better than a variable rate?
Neither structure is automatically better. A fixed rate provides greater repayment certainty, while a variable rate commonly provides greater flexibility. The suitable option depends on the borrower’s circumstances and future plans.
Can I make extra repayments on a fixed loan?
Some lenders permit limited additional repayments during a fixed period. The permitted amount and conditions vary, and break costs may apply if the loan is repaid or changed beyond the allowed limits.
Can a fixed-rate loan have an offset account?
Some lenders offer partial or full offset arrangements with selected fixed-rate products, but many do not. Check the exact product features and fees before proceeding.
What happens if I sell during a fixed-rate period?
The lender may charge a break cost when the fixed loan is repaid early. The amount depends on the loan, remaining fixed term, lender calculation and movements in market rates.
Does the RBA set my mortgage rate?
No. The RBA sets the cash-rate target, which influences mortgage rates. Individual lenders decide the rates applied to their loan products and customers.
Can I split my home loan later?
This may be possible, but it depends on lender policy, the existing loan structure and whether fees or break costs apply.
Should I fix my rate before rates rise?
Predicting future interest-rate movements is difficult. The decision should focus on affordability, repayment certainty, loan flexibility and your expected plans rather than relying only on a rate forecast.
Review Your Home Loan Structure
Not sure whether fixed, variable or split repayments may suit your position?
I can help you compare available home-loan structures, rates, fees and features based on your circumstances and future plans.
Book a Free Home Loan Review
Need to understand your potential borrowing position first? Check My Borrowing Power.
Call or SMS Nick on 0426 259 327.
Reviewed by Nicholas Parpis — Australian Credit Representative 552460 and Director of Truth Group Pty Ltd.
Information is general and does not consider your individual objectives or financial circumstances. Rates, fees, features and lender policies can change. Loan approval remains subject to lender assessment, valuation, eligibility requirements and credit policy.
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