Fixed vs Variable Interest Rates: Which is Right for You?

Variable rates fluctuate with the Reserve Bank's cash rate and lender decisions. When the RBA raises rates, your repayments increase; when rates fall, you pay less. Most variable loans charge 6.0-7.5% currently. Benefits include: offset accounts, unlimited extra repayments, redraw facilities, and no break fees if you refinance or sell.

Fixed rates lock your interest rate for 1-5 years (most commonly 3 years). Regardless of market changes, your repayments stay the same. Current fixed rates range 5.5-6.5% depending on term and lender. After the fixed period ends, the loan reverts to the lender's variable rate unless you refinance.

Flexibility is the key advantage. Make unlimited extra repayments to pay off your loan faster without penalties. Access offset accounts to reduce interest on every dollar saved. Refinance or exit anytime without break costs. If the RBA cuts rates, your repayments automatically decrease, saving thousands over the loan term.

Certainty and budgeting are the main appeals. Know exactly what your repayments will be for years ahead, unaffected by rate rises. If the RBA increases the cash rate by 1%, variable borrowers pay significantly more—but your repayments don't change. This peace of mind particularly suits first home buyers with tight budgets.

Variable rate risk: repayments can increase if rates rise, impacting your budget. Fixed rate risk: you're locked in even if rates fall, and breaking the contract early (to refinance or sell) can cost $10,000-$30,000+ depending on remaining term and rate movement. Fixed loans typically offer limited extra repayments ($10,000-$30,000 annually) and no offset accounts.

Many borrowers split their loan 50/50 or 60/40 between fixed and variable. This provides some rate certainty while maintaining flexibility. For example: fix 50% for budget protection, keep 50% variable with offset account and extra repayment capacity. If rates fall, half your loan benefits; if they rise, half is protected.

Consider: Do you value certainty or flexibility more? Is your budget tight or comfortable? Are you planning to make extra repayments or sell within 3 years? If the cash rate is historically low and expected to rise, fixing provides protection. If rates are high and likely to fall, variable offers more benefit. A mortgage broker can model both scenarios with your numbers.