Choosing between a fixed and variable home loan is one of the most important decisions Australian borrowers face. Each option has distinct advantages and considerations that can significantly impact your financial situation over the life of your loan.

Variable Rate Home Loans

Variable rate loans fluctuate with market conditions and RBA cash rate changes. The key advantages include flexibility to make unlimited extra repayments without penalties, access to features like offset accounts and redraw facilities, and the ability to potentially benefit from rate decreases. In 2025, variable rates in Australia typically range from 5.99% to 6.99% for owner-occupiers.

The primary benefit of variable rates is flexibility. You can make unlimited extra repayments, helping you pay off your loan faster and save on interest. Most variable loans come with offset accounts, allowing your savings to reduce the interest you pay on your mortgage. If rates fall, your repayments automatically decrease, providing immediate financial relief.

However, variable rates carry uncertainty. Your repayments can increase if the RBA raises rates, making budgeting more challenging. During periods of rate volatility, your monthly repayments might change several times within a year, requiring careful financial management and a buffer to handle increases.

Fixed Rate Home Loans

Fixed rate loans lock in your interest rate for a set period, typically 1-5 years. This provides certainty and protection from rate rises, making budgeting easier. Current fixed rates range from 5.69% to 6.49%, offering some savings compared to variable rates. However, fixed loans come with restrictions on extra repayments (usually limited to $10,000-$30,000 per year) and significant break fees if you need to exit early.

The certainty of fixed rates is invaluable for borrowers who value predictability. You know exactly what your repayments will be for the fixed period, making household budgeting straightforward. If rates rise during your fixed term, you're protected from those increases, potentially saving thousands of dollars.

The downside is inflexibility. Most fixed loans restrict extra repayments to a capped amount per year—typically $10,000 to $30,000. If you want to pay more than this, you may face penalty fees. Fixed loans rarely offer offset accounts, meaning your savings can't reduce your mortgage interest. If you need to break your fixed loan (due to selling your property or refinancing), break fees can be substantial—sometimes tens of thousands of dollars depending on how much rates have moved since you fixed.

The Split Loan Strategy

Many Australian borrowers choose a split loan strategy, fixing a portion of their loan while keeping the remainder variable. This approach provides some protection from rate rises while maintaining flexibility. A common split is 50/50 or 70/30 (fixed/variable), allowing you to hedge your bets on rate movements while retaining access to offset accounts and flexible repayment options.

Split loans offer the best of both worlds. You get certainty on part of your loan while maintaining flexibility on the rest. For example, with a $600,000 loan split 50/50, you might fix $300,000 at 5.89% for three years while keeping $300,000 variable at 6.24%. This means half your repayments are stable, while you can make extra repayments and use an offset account on the variable portion.

The split strategy is particularly effective in uncertain rate environments. If rates rise, you benefit from having fixed part of your loan. If rates fall, your variable portion decreases, and you haven't locked your entire loan at a higher rate. You can adjust your split ratio based on your circumstances—those with tighter budgets might fix more for stability, while those wanting maximum flexibility might keep more variable.

Making Your Decision

Consider your risk tolerance, cash flow situation, and economic outlook. If you value certainty and believe rates will rise, fixing can provide peace of mind. If you want flexibility and think rates might fall, variable could be better. Your choice should align with your financial goals, employment stability, and plans for extra repayments. Always compare the total package, not just the interest rate, as features and fees vary significantly between products.

Ask yourself these key questions: Do you have surplus income to make extra repayments? If yes, variable or a split might be better. Is your employment stable with predictable income? If uncertain, fixed might provide needed security. What's the rate differential between fixed and variable? If fixed rates are significantly lower, they may offer good value even with less flexibility. How long do you plan to keep this loan? If you might sell or refinance within a few years, consider the potential break fees of fixed loans.

Work with a mortgage broker who can model different scenarios based on your specific situation. They can show you how your repayments would look under different rate scenarios and help you understand the true cost of features and restrictions across different loan types.