Fixed vs Variable Rate Mortgage — How to Choose

Every home loan application reaches the same fork in the road: do you lock in a fixed rate, or go variable? Lenders will tell you their current rates for both, but they won't help you think through which one actually suits your situation. The right answer depends on your income stability, how long you plan to stay in the property, your tolerance for payment uncertainty, and where the rate cycle appears to be heading.

This guide breaks down how each option actually works, what the real costs and benefits are, and how to use LoanLens to run the numbers on both before you decide.

How fixed rate loans work

A fixed rate mortgage locks your interest rate for a set period — most commonly 1, 2, 3, or 5 years in Australia. During that fixed period, your repayments stay exactly the same regardless of what the Reserve Bank of Australia (RBA) does with the cash rate. If rates rise by 1%, you pay the same as before. If they fall by 1%, you also pay the same.

At the end of the fixed period, the loan typically reverts to the lender's standard variable rate unless you refinance or fix again. That revert rate is often higher than competitive variable rates, so it's worth reviewing well before the fixed period ends.

The key constraint with fixed rates is break costs. If you want to pay off the loan early, refinance, or sell the property before the fixed term ends, the lender may charge a break fee. This fee can be significant — sometimes tens of thousands of dollars — and is calculated based on how much rates have moved since you fixed. In a falling rate environment, break costs are typically higher because the bank is losing out on anticipated interest income.

How variable rate loans work

A variable rate loan moves with the market. When the RBA raises the cash rate, your lender will typically pass through most or all of the increase within a few weeks. When the RBA cuts rates, your repayments come down by a similar amount. Variable rates are also sometimes adjusted independently by lenders in response to their own funding costs.

The main advantages of variable rates are flexibility and features. Variable loans typically allow unlimited extra repayments without penalty, and often include an offset account — a savings account linked to your loan where the balance reduces the interest you pay. These features can save a significant amount over the life of the loan for borrowers who maintain savings alongside their mortgage.

Side-by-side comparison

The split loan option

Many borrowers split their loan — fixing a portion and leaving the remainder variable. For example, on a $600,000 mortgage, you might fix $400,000 and leave $200,000 variable. This gives you repayment stability on the fixed portion while still being able to make unlimited extra repayments on the variable portion and use an offset account against it.

Split loans are a practical middle ground for people who want some certainty but don't want to give up all the flexibility of a variable loan. The proportions are up to you — 50/50 is common, but any split works.

How to model both scenarios with LoanLens

The most useful thing you can do before deciding is calculate your monthly repayments for both options at their respective rates, then see the difference in total interest paid over the loan term. LoanLens lets you run both scenarios back to back:

1. Enter the loan amount and select Australia as your region
2. Set the interest rate to the fixed rate your lender is offering — note the monthly repayment
3. Change the rate to the variable rate — note how the repayment changes
4. Use the savings planner to see how extra repayments on a variable loan reduce the total interest and loan term

For example, on a $550,000 loan over 30 years: the difference between 6.0% and 6.5% is roughly $170 per month in repayments, and about $60,000 in total interest over the life of the loan. Running these numbers yourself, rather than relying on a lender's verbal comparison, puts you in a much better position to evaluate the real trade-off.

Questions worth asking yourself

• Do you have a predictable income, or does your cash flow vary from month to month? Variable repayments are harder to manage on irregular income.
• Is there any chance you'll sell or refinance within the fixed period? Break costs could outweigh the benefit of fixing.
• Do you have savings you could hold in an offset account? Variable loans with offset accounts can be substantially cheaper in practice.
• Are rates currently high or at the bottom of a cycle? Fixing when rates are high locks in the high rate. Fixing near the bottom can work in your favour.