Fixed vs Variable Rate

A fixed-rate loan locks your interest rate for a set term - typically one to five years - so the repayment cannot move regardless of what the market does. A variable-rate loan prices off your lender's funding costs, which track the Reserve Bank's cash rate, so the repayment moves with every rate decision. Australian lenders overwhelmingly sell variable by default, and the fixed book exists because some borrowers will pay a premium for certainty. The trade is symmetrical: the fixer is betting rates will rise or staying up at night worrying they will, and the variable borrower is betting they will not.

The costs sit in opposite corners. Fixed loans charge break costs to exit early - a formula-based penalty that can reach five figures - and most restrict extra repayments to $10,000 or $20,000 a year. Variable loans are flexible: unlimited extra repayments, an offset account, and an exit whenever you like, in exchange for wearing every rate move. Many Australian borrowers solve the argument with a split loan, part fixed and part variable, which is exactly what it sounds like: two loans, two behaviours, one property.

Walk the fixed side. You lock $600,000 over 30 years at 5.99 percent for three years, and the repayment is $3,594 a month for the full 36 months - a 0.75 percent cash rate move in either direction changes nothing. The lender prices the fix off its own funding costs rather than the cash rate, which is why fixed rates can move when the Reserve Bank stands still.

The variable side prices the same loan at 6.34 percent, a repayment of $3,778 a month - $184 more today in exchange for flexibility. When the cash rate falls 0.25 percent, the repayment drops within a month or two; when it rises, the same applies in reverse. The fixed vs variable calculator runs both sides side by side on your own loan.

Break costs are the fixed side's trapdoor, and the formula is worth knowing. The lender prices the gap between your contract rate and its current funding rate across the remaining term. Fix at 2.19 percent, watch rates climb to 6 percent with two and a half years remaining, and the exit formula lands in the tens of thousands. MoneySmart's guidance is blunt: do not fix unless you are certain you will not need to break. Extra repayments on fixed loans are capped at $10,000 to $20,000 a year on most products, which is why the offset account - a variable feature - matters so much.

For an Australian reader, this decision runs through the biggest debt you will ever hold, and the stakes are the repayment, not the rate. MoneySmart's guidance frames the choice as certainty versus flexibility, and warns that fixed-loan break costs can run to tens of thousands. The offset account is the other half: it sits on the variable side of the fence. The offset account entry covers why it can be worth a slightly higher rate. Fix and you buy certainty with capped flexibility; stay variable and you rent the certainty month to month.

A colleague named Brent (yes, that Brent) fixed $600,000 for three years at 2.19 percent at the top of the pandemic era, then accepted a job in another city mid-fix. The break-cost formula priced the exit at roughly $50,000, more than the interest he had saved. So he rented the old place out and ran two addresses for two years; the fix was not wrong, the exit plan was missing. The highest-leverage thing most Australians can do is size the exit before signing. Check the break-cost formula, check the extra-repayment cap, and run the mortgage calculator on both sides of the split before committing.