Fixed or variable: how to think about your interest rate

One of the first decisions you make with a home loan is whether the interest rate will be fixed, variable, or a mix of the two. It is tempting to treat this as a guess about where rates are heading. A more useful question is what you need from your loan.

Fixed rates

With a fixed rate, your interest rate and repayments stay the same for a set period, commonly between one and five years. That certainty makes budgeting easier, which can be valuable in the first years of a loan when money is tightest.

The trade-off is flexibility. Fixed loans often limit extra repayments, may not offer an offset account, and can carry break costs if you sell, refinance or pay the loan out during the fixed period. Break costs can be significant, so it is worth thinking about how settled your plans are before fixing.

Variable rates

A variable rate can rise or fall over time, so your repayments can change. In return, variable loans usually offer more features, such as unlimited extra repayments, redraw and offset accounts. If you expect to pay the loan down faster than required, or you may sell or refinance within a few years, that flexibility has real value.

Splitting your loan

Many borrowers split their loan, fixing one part and leaving the rest variable. This gives some certainty while keeping the ability to make extra repayments on the variable portion. There is no rule about the proportions; the split should reflect how much certainty you want and how much you expect to repay early.

When the fixed period ends

At the end of a fixed term the loan usually reverts to the lender's variable rate, which may be higher than other rates available at the time. Put the end date in your calendar and review your options a couple of months beforehand, rather than letting the loan roll over unnoticed.

Questions to ask yourself

• How much would a rise in repayments affect my budget?
• Am I likely to make extra repayments or use an offset account?
• Could I sell, renovate or refinance in the next few years?

There is no universally right answer. A broker can show you how each option would work with your numbers, and our loan repayment calculator lets you see how repayments change at different rates.