Fixed vs. Variable Interest Rates (Pros & Cons)

This decision dictates how much you will pay each month, but more importantly, it determines who takes on the risk if the economy changes.

Variable Rates: The Flexible Option

A variable rate means your interest rate can change at any time, usually in response to the Reserve Bank of Australia (RBA) moving the official cash rate.

• The Pros: Variable loans are highly flexible. You can make unlimited extra repayments to pay down the loan faster, and they almost always allow you to attach a 100% Offset Account. If the RBA cuts interest rates, your monthly repayments will go down.
• The Cons: Uncertainty. If the RBA raises the cash rate (as we saw aggressively throughout 2022 and 2023), your bank will pass that increase on to you, and your monthly repayments will instantly become more expensive.

Fixed Rates: The Certainty Option

A fixed rate "locks in" your interest rate for a set period, typically between 1 and 5 years.

• The Pros: Total budget certainty. Even if the RBA raises interest rates by 2% tomorrow, your monthly repayment will not change by a single cent for the duration of your fixed term. This is excellent for first-home buyers on a tight budget.
• The Cons: Lack of flexibility. Fixed loans usually cap how many extra repayments you can make (often maxing out at $10,000 per year), and they rarely offer an Offset Account. If the RBA cuts interest rates, you are trapped paying the higher fixed rate until your term expires. If you try to break a fixed loan early, the bank will charge you a massive "break fee".

The 2026 Context

As of mid-2026, the RBA cash rate target remains steady at 4.35%. Consequently, the average rate for a new owner-occupier home loan is sitting broadly in the high-5% to low-6% range.

Currently, many lenders are pricing their 1-to-3 year fixed rates very similarly to their variable rates. This means fixing your rate today is less about "beating the bank" and more about asking yourself: Do I value the ability to make extra payments (Variable), or do I value the peace of mind knowing my budget won't blow up (Fixed)?

The Split Loan (The Best of Both Worlds)

If you can't decide, you don't have to. Most banks allow you to "split" your loan.

For example, on a $600,000 mortgage, you could fix $400,000 for three years to guarantee that portion of your payment won't change, and leave the remaining $200,000 on a variable rate so you can still use an offset account and make extra repayments without penalty.

Interactive: Rate Shock Simulator

See how vulnerable your budget is to a rate change. Enter your loan details below to see how a sudden RBA rate hike would impact a variable loan versus a fixed loan.

General Advice Warning: The information provided here is for general educational purposes only. It does not take into account your personal financial objectives, situation, or needs. Before making any financial decisions, please consider the appropriateness of the information and consult with a licensed financial adviser.