Every loan comes down to the same choice at some point: lock in a rate, or let it move with the market. Fixed and variable rates are not really about which is cheaper - historically, each has come out ahead at different times - they are about how much certainty you want, and what flexibility you are willing to trade for it.
How a fixed rate works
A fixed rate locks in your interest rate for a set period - commonly one to five years - so your repayment stays the same regardless of what happens to market rates during that term.
- Repayment certainty for budgeting, unaffected by rate rises
- Protection if rates increase during your fixed term
- Can suit borrowers who want a known, stable outgoing
- You do not benefit if rates fall during the fixed term
- Extra repayments are often capped, with break costs for exiting early
- The loan reverts to a variable rate once the fixed term ends
How a variable rate works
A variable rate moves in line with the lender's own rate settings, which are influenced by (but not identical to) the official cash rate. Your repayment can go up or down over the life of the loan.
- Repayments can fall if rates decrease
- Usually no limit on extra repayments or lump sums
- More flexibility to refinance or exit without break costs
- Repayments can rise if rates increase, with no cap
- Harder to budget precisely for the full loan term
- Requires more buffer for rate movements than a fixed term
What a split loan does
A split loan divides your balance between a fixed portion and a variable portion in a ratio you choose - for example, 60% fixed and 40% variable. This gives you some certainty on part of the loan while keeping the flexibility of extra repayments on the rest, rather than committing entirely to one structure.
What actually decides which is right for you
This is less about predicting where rates are heading and more about your own tolerance for repayment changes. If a rate rise of even 1-2% would genuinely strain your budget, the certainty of a fixed rate has real value regardless of whether it turns out to be the cheaper option in hindsight. If you have buffer and want maximum flexibility - extra repayments, an easy exit, upside if rates fall - a variable rate may suit better.
For how this plays into the total cost of a loan alongside fees and charges, see our guide to APR vs. interest rate vs. comparison rate, and for the deposit side of a home loan decision, see how much deposit you actually need.
The takeaway
Neither a fixed nor a variable rate is objectively better - each one trades certainty for flexibility in the opposite direction. The right choice depends on how much a repayment increase would actually affect you, not on trying to guess where rates go next.
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Finance is subject to lender approval, lending criteria, terms, conditions, fees and charges. The information in this article is general and does not take into account your personal or business needs.
Last reviewed: 11 September 2026. This article was prepared using information available from the Australian Securities and Investments Commission and Moneysmart. This content provides general information only. It should not be treated as personal financial, tax, legal or credit advice.
Frequently asked questions.
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Not necessarily. Lenders sometimes price fixed rates above variable, sometimes below, depending on where they expect rates to move. A fixed rate can end up cheaper or more expensive than a variable rate over the same period - the value is the certainty, not a guaranteed saving.
The loan typically reverts to the lender's standard variable rate, or you can choose to fix again at the current rate on offer. It is worth reviewing your options before the fixed term ends, since the revert rate is not always competitive.
Often, but usually only up to an annual limit, and exceeding it - or exiting the fixed term early - can trigger a break cost. Variable rate loans generally allow unlimited extra repayments without this restriction.
A split loan divides the balance between a fixed portion and a variable portion, so you get some certainty and some flexibility in the same facility. The split ratio is negotiable and can suit borrowers who want to hedge rather than commit fully to either option.
It depends on how much certainty you need against how much flexibility you want, and your view on where rates are heading. A broker can talk through both scenarios against your situation rather than picking based on the current headline rate alone.
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