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Fixed vs Variable Interest Rates

One of the first decisions you'll face with a home loan is whether to choose a fixed or variable interest rate — or a mix of both. Neither option is universally better; each suits different priorities around certainty, flexibility and risk. Here's how they compare.

How a Fixed Rate Works

A fixed interest rate stays the same for an agreed period, commonly one to five years, regardless of what happens to broader interest rates during that time. This means your repayment amount stays predictable for the fixed term, which can make budgeting easier. Once the fixed period ends, the loan typically reverts to the lender's standard variable rate unless you choose to fix again or refinance.

Common trade-offs with fixed rates

• Repayments won't rise if interest rates increase during the fixed period
• You also won't benefit if interest rates fall during that time
• Fixed loans often limit extra repayments or restrict features like offset accounts
• Break costs can apply if you exit or refinance a fixed loan early

How a Variable Rate Works

A variable interest rate can move up or down over the life of the loan, generally in response to changes in the lender's funding costs and broader market conditions. Your repayments adjust accordingly, which means more uncertainty, but also more flexibility.

Common advantages of variable rates

• Usually allow unlimited extra repayments without penalty
• Often come with features like offset accounts and redraw facilities
• You benefit if interest rates fall
• Generally more flexible to refinance without break costs

Splitting Your Loan

Many borrowers choose a split loan, fixing a portion of the balance while keeping the rest variable. This can offer a middle ground — some repayment certainty on the fixed portion, while retaining flexibility (like extra repayments or an offset account) on the variable portion.

Thinking About Which Suits You

A useful way to approach the decision is to ask how much you value repayment certainty versus flexibility, and how comfortable you are with your repayment potentially changing. Rather than trying to predict where rates are heading, many borrowers focus on what they can comfortably afford under a range of scenarios. You can use the Smarter Mortgage Calculator to see how your repayment would look at a few different rate levels, which can help stress-test your budget either way.