Fixed vs variable home loans

What is the difference between fixed and variable home loans?

A ‘fixed rate home loan’ is one in which the interest rate remains set in place or ‘fixed’ for a specified period of time.  A ‘variable rate home loan’, on the other hand, is one where the interest rate can fluctuate, going up or down depending on market forces and the decisions of your lender. It’s also possible to combine these two into what is known as a split rate home loan, potentially allowing you to take advantage of the features of both.

With interest rates on the rise in 2026 and the big banks predicting further hikes, you may be looking at your home loan and wondering whether locking in a fixed rate could help you stave off further mortgage pain. When it comes to the great rate debate, though, there’s no straightforward answer, as there are advantages and disadvantages to both fixed and variable.

How does a fixed rate home loan work?

A fixed rate home loan will have a term, generally one to five years, during which your rate will be locked in place. Typically, the shorter the term of the loan, the lower the rate will be. At the end of a fixed term, your bank or lender will typically move on onto a variable rate loan by default – you can either stick with this, or choose to refinance to another loan of your choosing.  You can typically break out of a fixed rate home loan early if you wish, although it is likely your bank or lender will charge you a break fee.

What are the pros and cons of a fixed rate mortgage?

Potential benefits of a fixed rate mortgage include:

• Protection against the effects of rate rises
• Certainty in knowing exactly how much your repayment will be
• Potential to avoid the high fees that can come with variable rate home loans

Potential drawbacks of a fixed rate mortgage include:

• Potential to miss out on the features offered by variable rate home loans
• Inability to make additional repayments, though some lenders may allow you to do this in some cases
• Having to pay break fees if you want to exit your loan early or refinance
• Potential to miss out on savings if rates fall

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How does a variable rate home loan work?

A variable rate home loan is one in which the interest rate you pay can go up or down. Generally speaking, banks and lenders will look at the decisions of the Reserve Bank of Australia (RBA), and will adjust their rates accordingly, or leave them in place, depending on how the RBA moves the official cash rate.

Variable rate home loans typically tend to have a much longer term than fixed rates, usually 30 years. They can come with features such as offset accounts and redraw facilities, that can allow you to lower the amount of interest you pay while still being able to draw on your money if you need it. They will sometimes come packaged with other extras such as credit cards and everyday banking accounts.

What are the pros and cons of a variable rate mortgage?

Potential benefits of a variable rate mortgage include:

• Flexibility to make additional repayments to your home loan, and reduce your interest repayments using an offset account
• Potential for your monthly mortgage repayments if your lender decides to lower their home loan variable rates
• Potential to  streamline your finances with features such as everyday bank accounts and offset and redraw facilities, and packaged extras like credit cards

Potential drawbacks of a variable rate mortgage include:

• Potential for higher repayments if your lender decides to put rates up
• Uncertainty around when and if rates will rise, making it harder for you to plan out your monthly household budget
• Higher fees that come alongside the features on offer

Is variable better than fixed for home loans?

There is no ‘better’ choice between fixed and variable rate home loans, so what is preferable will come down to your personal choice and financial situation.

At the present time, economists at three of Australia’s big four banks are predicting that the cash rate will go up at least once more in 2026, which will mean that banks are in turn likely to hike their variable rates.

If you’re currently on a variable rate, then you may well be contemplating whether it’s time to lock in a cheaper fixed rate, to protect yourself against further hikes down the line.

If that’s the case, then it’s important to weigh up the pros and cons, and also worth making sure that the costs of refinancing your loan won’t eat up any potential savings.

If you’re not satisfied with your current rate, another option is to contact your lender directly to try and negotiate a lower interest rate.