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Should I Have a Fixed Rate, Variable Rate or Split Rate?
February 27, 2017 • 5 minutes
When you're choosing a home loan, the fixed rate vs variable rate debate feels endless. You've probably heard arguments for both sides, but here's what matters: the Reserve Bank of Australia cut rates three times in 2025, bringing the cash rate to 3.6%, yet inflation jumped back to 3.8% in October. With rate hikes potentially back on the table for 2026, your choice between fixed, variable, or split could save – or cost – you thousands.
Key Takeaways:
- Fixed rate: Locks your repayments for 1-5 years, protecting you from rate rises but restricting extra repayments.
- Variable rate: Moves with the market, giving you flexibility and offset accounts, but exposing you to rate increases.
- Split rate mortgage: Combines both – you fix part of your loan while keeping the rest variable for flexibility.
- Current market: Fixed rates are sitting around 5.75-6.25% for 2-year terms, while variable rates hover near 6%.
- Who wins: It depends entirely on your budget flexibility, how long you're staying put, and whether you value certainty over features.
Contents
Fixed Rate vs Variable Rate: What's the Difference?
Fixed Rate
A fixed-rate loan locks in your interest rate for a set period – typically 1 to 5 years. Your repayments won't budge during that time, regardless of what the RBA does with the cash rate. Once the fixed term ends, you'll typically revert to the lender's standard variable rate unless you renegotiate.Variable Rate
A variable-rate loan means your interest rate can change at any time, usually following (but not always matching) the RBA cash rate movements. Your repayments could decrease if rates fall or increase if they rise. You get more loan features in exchange for that uncertainty.Fixed Rate Loans: Pros and Cons
The upside: You can budget with absolute certainty. If you're on a tight household budget or about to have major expenses (kids, renovations, career change), knowing your exact mortgage payment for the next few years removes one major variable from your life. And if rates do climb, which some economists now predict for early 2026, you're protected. The downside: Break costs can be brutal. If you need to sell, refinance, or pay off your loan early during the fixed period, you could face thousands in penalties, particularly if market rates have dropped since you locked in. Most fixed loans also restrict extra repayments to around $10,000 per year, and you'll typically miss out on offset accounts that could save you interest.Variable Rate Loans: Pros and Cons
The upside: Maximum flexibility. You can make unlimited extra repayments without penalty, use offset accounts to reduce your interest (potentially saving you tens of thousands over the loan's life), and access redraw facilities if you need those extra funds back. If the RBA continues cutting rates in 2026 as some expect, your repayments drop automatically without needing to refinance. The downside: Rate rise risk is real. Your repayments could jump $100-$200 per month if the RBA hikes rates by just 0.25%. That's manageable for some households but devastating for others. The RBA held rates at its December 2025 meeting specifically because inflation came in higher than expected, and some economists are now discussing potential rate hikes in early 2026.Split Rate Mortgage: The Middle Ground
Can't decide? A split rate mortgage lets you divide your loan – say 60% fixed and 40% variable, or whatever ratio suits you. You get repayment certainty on the fixed portion while maintaining access to offset accounts and extra repayment flexibility on the variable portion. Split loans are particularly smart right now. With fixed rates currently sitting below variable rates (around 0.6% lower according to December 2024 Statista data), you can lock in some of that lower rate while keeping enough variable to benefit if rates drop further. About 35% of new loans in 2025 were fixed, up from just 15% in 2022 – borrowers are clearly hedging their bets. The trade-off? You'll manage two loan accounts, which can result in double the fees and slightly more administrative work. But for most people, that's a small price for genuine flexibility.How to Choose Between Fixed, Variable, or Split
Ask yourself these questions:- Can you handle repayment increases of $150–$250 per month? If not, lock in at least part of your loan on a fixed rate. Financial stress isn't worth the gamble.
- Do you have a healthy offset account or emergency fund? If you've got $20,000+ sitting in savings, a variable loan with an offset could save you more in reduced interest than a fixed rate would.
- How long are you staying in this property? Planning to sell or renovate within 2 years? Variable gives you the exit flexibility. Staying 5+ years? Fixed could provide welcome stability.
