Fixed and variable rates: the trade-offs

Resources · Home loans and saving · 5 min read Building

Key points

• A fixed rate stays the same for a set period. A variable rate can move up or down.
• Fixed gives certainty about repayments. Variable usually gives more flexibility.
• A one percentage point change on a large loan can shift repayments by hundreds a month.
• Neither is cheaper in advance. It depends on what rates do, and nobody knows that.

Fixed vs variable rate: what the terms mean

The fixed vs variable rate question comes down to one thing. Do you want your repayment locked, or free to move?

A variable rate (sometimes called floating, adjustable or tracker) can change during the loan. It usually follows a benchmark, such as a central bank rate, or moves at the lender’s discretion.

A fixed rate is locked for a set period. How long depends a lot on the country. In the US, loans fixed for the whole 15 or 30-year term are common. In many other countries, rates tend to be fixed for a few years at a time. After that the loan rolls onto a new fixed deal or a variable rate.

Some loans are split, with part fixed and part variable.

What a rate change does to repayments

Here’s what we’re assuming:

• Loan: $400,000
• Term: 30 years, interest charged monthly
• Repayments rounded up to the cent

The same maths works in any currency.

Going from 6% to 7% adds $263.00 a month. That’s $3,156.00 a year.

A rate change part way through

Say the loan starts at 6% and the rate changes after three years. After 36 repayments of $2,398.21, the balance is $384,335.99, with 27 years left.

If the rate rises to 7%, the repayment becomes $2,643.53. That’s $245.32 more a month. If it falls to 5%, the repayment becomes $2,163.97, which is $234.24 less.

Fixed for those three years? Neither change would touch you until the fixed period ended. Variable? You’d feel it straight away, for better or worse.

The case people make for fixed

The big draw is predictability. You know your repayment for the whole fixed period, and that makes budgeting simpler. If rates rise, you’re shielded until the term ends. Some people simply value that certainty more than a possible saving, and that’s a fair call.

But there’s a price. If rates fall, you get nothing. You keep paying the fixed rate.

Fixed loans often cap extra repayments or charge you for going over a set amount. Leave early, say to sell or refinance, and you can be hit with break costs. In some countries and loan types these can be large, and they often depend on how rates have moved since you fixed.

Features tend to be thinner as well. Offset accounts and redraw, where they exist, are often limited or missing on fixed loans. And when the fixed period ends, your repayment can jump if rates have climbed in the meantime.

The case people make for variable

When rates drop, your repayments drop too. That’s the obvious upside.

Variable loans are also more flexible. They more often allow unlimited extra repayments, offset or redraw, and you can usually leave without big break costs. Selling or refinancing tends to be cheaper.

The flip side is exposure. Repayments can go up with little notice. So you need room in your budget to absorb a rise, and you can’t plan quite as neatly.

Split loans

A split loan fixes part of the balance and leaves the rest variable. Half and half, for example. You get some protection from rises and some benefit from falls, and the variable part can usually take extra repayments.

The cost is complexity. Two rates. Two sets of rules. And the fixed part still carries break costs.

Questions that help you weigh fixed vs variable rate

There’s no answer that suits everyone. These questions can help you work out yours:

• If repayments rose by $250 or $300 a month, could your budget absorb it?
• How likely are you to sell, move or refinance during the fixed period?
• Do you plan to make extra repayments or use an offset account?
• How much is certainty worth to you, compared with a possible saving?
• Do you have an emergency fund to fall back on?

Trying to predict rates is guesswork, even for professionals. So many people flip the question round and ask which risks they can live with. If repayments are already hard to meet on either type, free debt help is available and confidential.

Common questions

Is a fixed or variable rate cheaper?

Neither is cheaper in advance. It depends on what rates do over the life of the loan, and nobody knows that.

What happens when a fixed rate period ends?

The loan usually moves onto a new fixed deal or a variable rate. Your repayment can jump if rates have risen since you fixed.

Can you split a home loan between fixed and variable?

Some loans are split, with part of the balance fixed and the rest variable. You get partial protection from rises and partial benefit from falls. But you’ve got two sets of rules to keep track of.

Try it

The home loan extra repayments calculator lets you compare repayments and total interest at different rates on your own numbers. To see your whole debt picture, find your Freedom Date.

General information only, not financial advice. Your situation is your own.

Sources

• Primary Mortgage Market Survey release (Freddie Mac), 27 August 2026