Fixed or Variable? The Mortgage Question Everyone Asks.
As a broker I am often asked whether it makes sense to fix your interest rate or choose a variable interest rate loan. Both options have their merits and drawbacks and many borrowers wonder if they can move between them as their needs change. In this post I will explain the key features of fixed and variable interest rate loans, how you can switch between them, what that means for an offset account and how a split loan can give you the best of both worlds.
What is a fixed interest rate loan?
A fixed interest rate loan locks in your rate for a set period—normally one, two, three or five years. During that term:
- Your repayments stay the same, giving you certainty in your budget
- You avoid any increases if official rates rise
- You miss out on any savings if official rates fall
At the end of your chosen term you can refix the loan for another period. Lenders typically offer fixed terms from one up to five years. When your fixed term expires you may:
- Let the loan roll onto the lender’s standard variable rate
- Refix with your current lender on a new fixed term
- Refinance with a different lender and choose a fresh fixed or variable structure
It is important to note that selling your property or refinancing your fixed-rate loan counts as an early termination. In that case the lender will apply a break fee. If market rates are higher than your fixed rate, you may avoid a fee or pay only a small amount. But if you enjoy a lower fixed rate than current market rates, the break cost can be significant.
What is a variable interest rate loan?
A variable interest rate loan moves in line with changes to the official cash rate set by the Reserve Bank of Australia and your lender’s own pricing decisions. Your repayments will rise or fall accordingly. Variable loans usually offer:
- Freedom to make unlimited extra repayments
- Full redraw of any extra repayments
- An offset account to reduce the interest you pay
- Easier switching between loan products or lenders without major fees
Because of that flexibility a variable loan can suit borrowers who want to pay down their balance quickly or access equity when needed.
Switching from variable to fixed
Contrary to common belief you do not always need a full refinance to fix a variable rate. Most lenders allow you to vary your loan by converting some or all of your variable balance into a fixed rate within the same account. This typically involves:
- A modest administrative fee rather than a full application fee
- Selection of a fixed term from current lender options
- No valuation fee if you stay with the same property and lender
- No need to requalify for serviceability unless you increase your loan size
After processing the variation your loan will consist of a fixed portion with its own expiry date alongside any remaining variable portion.
Switching from fixed back to variable
If you move from fixed back to variable before your fixed term ends you will incur a break fee. Lenders calculate this fee to compensate for the interest they lose when you exit early. To avoid significant costs you should:
- Wait until the fixed term expires and let the rate revert to variable
- Plan any property sale or refinance around the fixed expiry date
Offset accounts and fixed rate loans?
An offset account is one of the most popular features of a variable rate loan. It works like a transaction account linked to your home loan. Every dollar in the offset reduces the balance on which interest is charged. That can save you thousands over the life of your loan. Unfortunately, most lenders do not allow an offset account on a fixed-rate portion. A few lenders may let you make extra payments up to a capped annual limit— say ten thousand dollars — but those funds are locked until the fixed term ends and cannot be redrawn. If you value offset access, keep at least part of your balance on a variable rate.
What is a split loan?
A split loan combines the stability of a fixed rate with the flexibility of a variable rate. You divide your total borrowing into two portions—one fixed and one variable—so you enjoy both features:
- The fixed portion gives budget certainty and shields you from rate rises
- The variable portion lets you use an offset account, make extra repayments, and redraw funds at any time
You might split evenly or tailor the ratio to suit your goals. For example, you could fix 60 percent of your balance for peace of mind and keep 40 percent variable to reduce interest via an offset account. When your fixed term expires you can refix that portion, switch it to variable or refinance it with another lender without affecting the variable slice.
How to make the choice?
There is no one size fits all solution. Consider your own circumstances:
- If you prize budgeting certainty and want protection against sudden rate rises a fixed rate could suit you
- If you value repayment flexibility redraw options and offset account access a variable rate may be better
- If you want a balance of both consider a split loan where part of your balance is fixed and part remains variable
Ready to explore your options?
Speak to our mortgage broker for a free consultation. At Mortgage Helpdesk we’ll help you find the right mix of fixed and variable lending to suit your financial goals.
