Fixed or variable? It's the question every Australian borrower faces when taking out or refinancing a home loan. The financial case isn't always obvious, and the answer depends on your circumstances, risk tolerance, and what you actually believe interest rates will do — which nobody can predict with certainty. Here's how to compare loans properly and make the decision rationally.
Try it yourself: Use our free Loan Comparison Calculator to compare any two loans side-by-side — different rates, terms, fees, and offset features — and see the true cost difference.
Fixed vs. Variable: What's the Difference?
Variable Rate Loans
Your interest rate moves with the market — typically in response to Reserve Bank of Australia (RBA) cash rate changes and lender pricing decisions. Variable rate loans in Australia typically offer:
- Offset accounts (a linked account where your savings reduce your loan balance for interest purposes)
- Unlimited extra repayments
- Redraw facility (access extra repayments you've made)
- No break costs — refinance or pay off anytime
Fixed Rate Loans
Your interest rate is locked for a set period — typically 1, 2, 3, or 5 years in Australia. After the fixed period ends, the loan reverts to a variable rate (the "revert rate" — often higher than competitive variable rates, so refinance before this happens).
- Certainty of repayments for the fixed period
- Protection against rate rises
- Extra repayments are usually capped ($10,000–$20,000 extra per year is typical)
- No offset account in most cases (or a partial offset)
- Break costs apply if you refinance, sell, or make significant extra repayments during the fixed period
How to Compare Two Loans Properly
The advertised interest rate is not enough to compare loans. The true cost comparison requires:
Total loan cost = Total repayments + All fees − Any features value
Comparison rate = An annualised rate that combines the interest rate and most standard fees into a single figure (required by law on all Australian loan advertisements)
Loan A: Variable, 5.89%, no annual fee, offset account
Loan B: Fixed 2-year, 5.59%, $395 annual fee, no offset
For a $600,000 loan over 25 years:
- Loan A monthly repayment: $3,832
- Loan B monthly repayment: $3,736 (saves $96/month in years 1–2)
- Loan A offset saving (assuming $30k in offset): $173/month interest saving
- Loan B annual fee: $395/year ($33/month)
Net advantage of Loan A (variable with offset): $96 + $173 − $33 = $236/month
Despite the higher headline rate, the variable loan with offset is significantly better in this scenario.
The Offset Account Advantage
An offset account is one of the most powerful features of an Australian variable rate home loan — and it's often missing from fixed rate products. Here's how it works:
If you have a $500,000 loan and $50,000 in a linked offset account, you only pay interest on $450,000. The $50,000 "offsets" against the loan balance for interest calculation purposes, saving you interest without reducing your available savings.
| Offset Balance | Annual Interest Saving (at 6.0%) | Equivalent Return |
|---|---|---|
| $10,000 | $600/year | 6.0% tax-free equivalent |
| $25,000 | $1,500/year | 6.0% tax-free equivalent |
| $50,000 | $3,000/year | 6.0% tax-free equivalent |
| $100,000 | $6,000/year | 6.0% tax-free equivalent |
The interest saving is tax-free because it's a reduction in interest paid, not interest income earned. For someone in the 39% marginal tax bracket, a 6.0% offset benefit is equivalent to earning a 9.8% return on savings — far above any savings account rate.
The Break Cost Risk of Fixed Loans
Fixed rate break costs are one of the most misunderstood features of Australian mortgages. They can be thousands or tens of thousands of dollars, and they apply if you:
- Refinance to a different lender
- Pay off the loan in full (e.g. from a property sale)
- Make extra repayments beyond the allowed cap
Break costs are calculated based on the difference between your fixed rate and the current wholesale rate for the remaining term. When market rates fall after you've fixed, your break costs increase — sometimes dramatically.
Scenario: You fixed at 5.8% for 3 years. After 1 year, market rates have fallen to 5.2%.
Break cost formula (simplified): Remaining loan × (Fixed rate − Current wholesale rate) × Years remaining
= $580,000 × 0.6% × 2 years = ~$6,960 break cost
You'd need to save significantly more than this on the new rate to make refinancing worthwhile.
Split Loans: A Middle Path
A split loan divides your mortgage between a fixed and variable portion. For example: 60% fixed at 5.59% (for repayment certainty) and 40% variable (for offset, extra repayments, and flexibility).
This approach is common and can be sensible, but beware that:
- The fixed portion still has break costs
- Offset account benefits only apply to the variable portion
- Some lenders charge fees for split products
When Fixed Rate Makes Sense
- You're on a tight budget and need repayment certainty to manage cash flow
- Rates are historically low and you believe they'll rise (though nobody can reliably predict this)
- You have no plans to sell or refinance during the fixed period
- You have minimal savings to put in an offset account (reducing the offset advantage)
When Variable Rate Makes Sense
- You have significant savings to park in an offset account
- You want flexibility to make extra repayments or pay off early
- You might sell or refinance within the next 2–3 years
- You're comfortable with rate fluctuations and have buffer capacity
- Rates are high and may fall (again — nobody truly knows)
Frequently Asked Questions
What is a comparison rate, and should I use it?
A comparison rate combines the interest rate with most standard fees (application fee, monthly fees, annual fees) into a single annual percentage figure. It's more useful than the headline rate for comparing the true cost. However, it doesn't account for all features — it excludes redraw fees, offset value, and early repayment costs.
How do I compare a loan with an offset account to one without?
Calculate the annual interest saving from your offset balance (average offset balance × interest rate). Subtract any premium the lender charges for the offset feature. This gives you the net value of the offset account to add to your comparison.
Should I fix my rate right now?
Nobody can reliably predict interest rate movements. The RBA's own forecasts have a wide confidence interval. The decision should be based on your personal cash flow needs, flexibility requirements, and savings balance — not on interest rate speculation.
Compare your loan options
Use our Loan Comparison Calculator to compare any two loans side-by-side — rates, fees, offset, and total cost — and see which one saves you more over the full term.
Also explore: Mortgage Calculator · Refinance Savings Calculator