Fixed vs variable: choosing a rate type

A fixed rate is an interest rate your lender locks in for a set period, so your repayments don't move while it lasts. A variable rate is one your lender can change over the life of the loan, so your repayments can rise or fall. A split loan holds part of your balance at each. That's the whole menu — everything else is detail about what each choice costs and what it buys.

It's tempting to treat this as a forecasting contest: fix if rates are going up, stay variable if they're coming down. But you're not the only one holding a forecast — the lender setting the fixed rate has one too, and it's already priced in. The more useful frame, and the one Moneysmart's guide takes, is a trade: fixed buys certainty and charges you flexibility; variable buys flexibility and charges you certainty.

So the questions that actually decide it are about you, not the market: how much of a repayment rise could your budget absorb before things got ugly? Do you plan to pay extra, move house, or refinance soon? Would a locked-in number help you sleep? Hold those, and the rest of this page slots into place.

Fixing does one thing brilliantly: it makes your biggest bill predictable. For the whole fixed period, the rate — and so the repayment — is whatever you signed. Rates can jump around you; your Tuesday stays the same. For a tight budget, a single income, or the first years of a mortgage when money is stretched, that predictability has real value.

The price is paid in flexibility, in three ways. First, if variable rates fall, you keep paying the higher locked rate — certainty cuts both ways. Second, fixed loans usually restrict or cap extra repayments, so getting ahead of the loan is harder while the fix lasts. Third — the one that surprises people — leaving early costs. Refinance, sell the house, or pay the loan out during the fixed term and the lender can charge a break fee, its recovery of the deal it priced for you. Moneysmart's switching guide flags it plainly: on a fixed loan, switching may mean paying to get out.

Fixed also tends to travel light on features: the accounts that make variable loans flexible — like an offset account, a linked balance that reduces the loan balance your interest is calculated on — are, as Moneysmart notes, generally a variable-loan feature. Fewer features can also mean a cheaper loan — just make sure you weren't planning to use the ones you're giving up.

A variable rate is your lender's to move. In practice lenders re-price mostly in the wake of cash rate changes — the rate the Reserve Bank targets — but they're not obliged to move in lockstep, in either direction. (How a cash-rate decision travels from the RBA's board room to your repayment is its own story — we've told it in The cash rate.) The result: your repayment can rise without you signing anything, and that possibility is the fee you pay for flexibility.

And the flexibility is genuine. Variable loans typically let you make unlimited extra repayments, which — as Moneysmart's pay-it-off-faster guide shows — matter most in the early years, when most of each repayment is interest. They're where offset accounts and redraw (access to the extra you've paid in) live. And they're easier to walk away from: no break fee waiting at the door, which quietly improves your bargaining position every time a better deal appears.

The discipline a variable loan asks of you is stress-testing. Don't budget for today's repayment; budget for a bigger one, and bank the difference while it doesn't arrive. If a plausible rise would break the budget, that's not a reason to panic — it's information about how much certainty you should be buying.

If the fixed-or-variable question feels like a coin flip, that's partly because it's a false binary. A split loan fixes one slice of the balance and leaves the rest variable — the proportions are yours. The fixed slice caps how bad a rate rise can get; the variable slice keeps a home for your offset, your extra repayments, and your exit options. You're not predicting the future, you're sizing your exposure to it.

However you split it, the deciding inputs are the same. Budget headroom: the less room between your income and your repayment, the more certainty is worth. Plans: if selling, moving, refinancing or a big windfall is plausible inside the next few years, a long fix is a break fee waiting to happen. Temperament: some people genuinely sleep better with a locked number, and that's allowed to count.

What shouldn't decide it: a hunch about where rates go next. Nobody reliably knows — and the fixed rates on offer already carry the lender's own view. Choose for your circumstances and either future is survivable; choose on a forecast and you're gambling with your house payment.

A fixed rate doesn't quietly renew — it expires. When the term is up, the loan rolls onto whatever rate your lender applies next, and that number is chosen by a lender who knows most customers won't be paying attention. Doing nothing is a decision, and it's rarely the cheap one. The repayment change at expiry can be substantial, so the date deserves a place in your calendar months in advance.

Expiry is also leverage, if you use it. Moneysmart's switching guide is blunt about the play: tell your current lender you're planning to switch to a cheaper loan, and to keep your business they may cut your rate — a phone call with a genuine payoff. Compare offers on the comparison rate — the single figure that folds most fees in with the interest (we unpack it in Hidden costs) — and weigh any switching costs against the saving with Moneysmart's free switching calculator.

Then the cycle restarts: fix again, go variable, or split — same questions, updated circumstances. The households that do well out of rate choices aren't the ones who guessed the market; they're the ones who showed up at each decision point and made the lender compete.