One of the most common questions we hear from home buyers and investors is: “Should I fix my interest rate or go variable?” It’s a decision that can affect your finances for years, so it deserves careful thought. Here’s an honest breakdown of both options — and how to decide which is right for your situation.
How Variable Rate Loans Work
A variable rate home loan has an interest rate that moves with the market — primarily tracking the Reserve Bank of Australia’s (RBA) official cash rate. When the RBA cuts rates, your repayments go down. When it raises rates, your repayments go up.
Advantages of variable rates:
You benefit from rate cuts immediately. Variable loans typically offer more flexible features — unlimited extra repayments, redraw facilities, and offset accounts. No break costs if you want to refinance or sell. Generally lower rates than fixed over the long term historically.
Disadvantages:
Your repayments can increase at any time. Makes budgeting harder, especially for first home buyers with tight cash flow.
How Fixed Rate Loans Work
A fixed rate loan locks in your interest rate for a set term — usually 1, 2, 3, or 5 years. Your repayments stay exactly the same throughout the fixed period, regardless of what the RBA does.
Advantages of fixed rates:
Certainty — you know exactly what you’ll pay each month. Protection against rate rises. Easier budgeting, especially for those on tight incomes.
Disadvantages:
You miss out if rates fall during your fixed term. Break costs can be substantial if you sell, refinance, or make large lump-sum repayments. Extra repayments are often capped (e.g. $10,000/year). Fewer features — most fixed loans don’t offer offset accounts.
The Split Loan: Best of Both Worlds?
Many borrowers opt for a split loan — fixing a portion of their loan (e.g. 50–70%) while keeping the remainder variable. This gives you the certainty of fixed repayments on part of your debt while retaining the flexibility to make extra repayments on the variable portion.
Split loans are particularly popular with investors who want to lock in rates on their investment debt while keeping their owner-occupied loan fully flexible.
What Does the Market Look Like Right Now?
The decision to fix should always be made in context of the current rate environment and the outlook for the RBA cash rate. In a rising rate environment, fixing offers protection. In a falling rate environment, staying variable allows you to benefit from cuts. Your broker will have a current view on where rates are heading and can help you time this decision.
Break Costs: The Hidden Risk of Fixed Rates
If you break a fixed rate loan early — because you’re selling, refinancing, or making a large extra repayment — you may be charged a break cost (also called an economic cost or early repayment adjustment). These can range from a few hundred dollars to tens of thousands depending on how much rates have moved since you fixed.
Always understand the potential break cost before you commit to a fixed rate, especially if you think you might sell in the next 1–3 years.
Which Should You Choose?
There’s no universal answer. The right choice depends on your financial situation, risk tolerance, how long you plan to hold the property, and the current rate environment. A good broker will walk you through the specific numbers for your scenario.
At Assembly Finance, we help you model both options — comparing the total cost of fixed vs variable across different rate scenarios — so you can make a truly informed decision. Get in touch today for a free consultation.
