Variable vs Fixed Rates Explained Simply

You're about to pick between a variable rate and a fixed rate, and it feels like a bet on where interest rates go next.

It isn't, really. It's a decision about how much certainty you want, and what you're willing to give up to get it.

What each one actually is

A variable rate moves. When your lender changes its rate, your repayment changes with it, up or down.

A fixed rate is locked for an agreed term, commonly one to five years. Your repayment doesn't move during that term no matter what happens in the wider market.

At the end of a fixed term the loan reverts to a variable rate, which is a moment worth diarising because the revert rate is not always competitive.

What you give up by fixing

This is the part that gets skipped in most explanations.

Fixed loans usually restrict extra repayments, often capping how much you can pay above the scheduled amount each year.

They frequently don't offer a full offset account, or offer a limited one.

And if you break a fixed loan early, by selling, refinancing, or paying it out, you can face break costs. Those aren't a fixed fee. They're calculated on the lender's loss and they can be substantial.

So fixing suits you less if you expect to sell, renovate, or throw large lump sums at the loan.

What you give up by staying variable

Certainty, and not much else.

Variable rates typically come with offset accounts, unlimited extra repayments, and the freedom to refinance without break costs.

The trade is that your repayment can rise, sometimes several times in a year, and your budget has to absorb it.

Splitting

You don't have to choose one.

A split loan fixes part of the balance and leaves the rest variable. You get partial certainty on your repayments, and you keep an offset and extra repayment flexibility on the variable portion.

For a lot of first home buyers this is the sensible middle, particularly where the budget is tight enough that a large rate rise would genuinely hurt.

How to actually decide

Ask yourself three questions.

• If your repayment rose noticeably, would that be uncomfortable or would it be a genuine problem? If it's a genuine problem, certainty is worth paying for.
• Do you expect to sell, refinance or make big extra repayments in the next few years? If yes, be cautious about locking a large portion.
• Do you have savings that would sit in an offset? If you do, that offset may be worth more to you than a slightly lower fixed rate.

Notice that none of those questions is "where do you think rates are going". Predicting that is not a first home buyer's job, and the lenders setting fixed rates have already priced their own view into the number they're offering you.

The honest answer

There isn't a universally right choice, and anyone who tells you there is doesn't know your situation.

What there is, is a right choice for your income stability, your buffer, your plans for the property and how you like to manage money.

That's the conversation worth having before you sign, and it's a different conversation to chasing the lowest advertised number.

Let's get you into a home.