Choosing between a fixed and variable home loan rate can feel like trying to predict the weather with your financial future on the line. Fix for peace of mind? Float for flexibility? Or split the loan and blend both? This guide unpacks how fixed and variable rates work, why borrowers choose each, the real costs and benefits, and how to think about splitting your home loan into fixed and variable portions. By the end, you'll have a practical framework to decide what suits your budget, risk tolerance, and plans.
Understanding Fixed Rates
A fixed-rate loan locks your interest rate for a set term-often 1-5 years. Repayments stay the same, simplifying budgeting. Because lenders shoulder rate risk, fixed rates can start slightly higher than comparable variable rates, but they protect you from future rises.
Key features
- Payment certainty: Repayments don't change during the fixed term.
- Budget stability: Cash flow is predictable.
- Limited flexibility: Extra repayments may be capped; redraw/offset can be restricted.
- Break costs: Exiting early (selling, refinancing, or paying off big chunks) can trigger significant fees.
When a fixed term ends, your loan usually reverts to the lender's variable rate unless you refix or refinance.
Understanding Variable Rates
A variable-rate loan moves with the lender's reference rate (influenced by central bank moves, funding costs, and competition). Repayments can go up or down. Variable loans usually offer more features and fewer penalties for flexibility.
Key features
- Flexibility: Extra repayments typically allowed, often with redraw and offset.
- Rate movement: Repayments fall if rates drop, rise if rates climb.
- Fewer break costs: Lower penalties if you refinance or sell.
- Promotional pricing: Lenders may discount variable rates, but discounts can change.
Variable loans suit borrowers who want flexibility, plan to make extra repayments, or expect to refinance or sell before a fixed term ends.
Comparing Costs: Beyond the Headline Rate
Choosing fixed vs. variable isn't only about today's rate. Consider:
- Total interest in different scenarios: stable rates, rate rises, rate drops.
- Fees: Upfront, annual package, discharge, and potential break costs on fixed.
- Features: Offset accounts, redraw, repayment frequency, extra repayment caps.
- Time horizon: How long you'll hold the property or loan; fixed terms punish early exits.
- Income stability: Fixed repayments suit stable income; variable suits those who can absorb swings and want prepayment flexibility.
A quick example: On a $500,000, 30-year loan, a 0.50% rate difference is ~$160/month or ~$58k in total interest over the full term if nothing else changes. But if you plan to sell or refinance in 3 years, break costs could outweigh the benefit of fixing. Model both the "likely" and "what if I'm wrong?" cases.
When Fixing Makes Sense
- You need repayment certainty: Ideal if your budget is tight or you value predictability.
- You believe rates will rise: Locking in before increases can save interest.
- You don't plan large extra repayments: Fixed loans often cap extra payments.
- You'll hold the loan through the fixed term: Minimizes break-cost risk.
Pitfalls
- Overfixing for too long: If rates fall or you need to sell, you may regret being locked in.
- Ignoring fees: A low fixed rate can be offset by high package or break fees.
- Missing offset/redraw: Cash sitting idle can't reduce interest if offset isn't available.
When a Variable Rate Makes Sense
- You want flexibility to repay faster: Unlimited extra repayments accelerate principal reduction.
- You expect to refinance or sell: Lower penalty risk if you exit early.
- You can handle repayment changes: Your budget can absorb increases.
- You want full offset access: Maximizes interest savings if you hold significant cash.
Pitfalls
- Underestimating rate rises: Multiple hikes can strain cash flow.
- Not using features: If you don't make extra repayments or maintain offset balances, you may pay more than expected.
The Middle Ground: Splitting Your Loan (Part Fixed, Part Variable)
A split loan divides your borrowing into two sub-accounts-one fixed, one variable. You choose the ratio (e.g., 50/50, 60/40). This blends certainty with flexibility.
Why split?
- Hedge rate risk: Fix a portion to shield against rises; keep a variable slice to benefit if rates fall.
- Keep flexibility: Use the variable portion for extra repayments, redraw, and offset.
- Manage break-cost risk: Only the fixed portion is exposed if you refinance or sell early.
How to think about the split ratio
- Cash flow focus: Fix enough so that a rise in variable rates won't break your budget.
- Extra repayment plans: If you plan aggressive prepayments, make that portion variable so you're not capped.
- Savings behavior: If you keep offset balances, pair them with the variable portion to maximize savings.
- Time horizon: If you might sell or upgrade in the fixed window, keep the fixed slice smaller to reduce break-cost risk.
Example split
- Loan: $600,000 over 30 years.
- Split: $300,000 fixed for 3 years; $300,000 variable with offset.
- Behavior: Channel surplus cash and bonuses into the variable side to reduce interest; enjoy stable repayments on the fixed side even if rates climb. If rates drop, the variable portion benefits while the fixed portion stays put.
Practical Steps to Decide
- Map your timeline: How long will you keep the property/loan? If likely under 3-5 years, avoid long fixes or keep the fixed slice smaller.
- Stress-test your budget: Model repayments at +1%, +2%, +3% on the variable portion. Choose a fixed share that keeps your budget workable.
- Clarify repayment goals: If you plan to prepay aggressively, size the variable portion to handle those payments without caps.
- Consider savings habits: If you hold cash (emergency fund, business income, bonuses), ensure the variable portion offers offset to maximize savings.
- Compare products, not just rates: Check offset availability, extra repayment limits on the fixed part, redraw rules, annual/package fees, and revert rates once the fixed term ends.
- Plan for the end of the fixed term: Diarize the expiry date 2-3 months ahead. Decide whether to refix, go fully variable, or refinance. Lenders' revert rates can be uncompetitive.
- Read the fine print on break costs: Understand the formula and triggers-selling, refinancing, or large extra repayments on the fixed side can incur costs.
How Offset Accounts Affect the Decision
Offset accounts can outweigh small rate differences. With a variable portion that has offset, every dollar in offset reduces daily interest. For a $300,000 variable slice at 6%, keeping $30,000 in offset saves roughly $1,800 a year in interest-about a 0.6% rate discount on that portion. If your lender offers offset on fixed portions (less common), check conditions; often offset is only on the variable side. For split loans, pair your main offset with the variable sub-loan so all spare cash works hardest.
Refinancing and Break Costs
Fixed loans can be expensive to break if wholesale rates have fallen since you fixed. Before you fix:
- Ask for a break-cost estimate under plausible scenarios.
- Keep the fixed term aligned with your plans (e.g., 2-3 years if you may upgrade).
- Remember: Only the fixed slice is exposed if you split.
If you expect to refinance soon (to renovate, consolidate, or leverage equity), prioritize variable or keep the fixed component minimal.
Common Mistakes to Avoid
- Fixing 100% when you plan to prepay: Caps and break costs can nullify the benefit.
- Ignoring revert rates: A sharp jump after the fixed period can erase savings; plan to renegotiate or refinance.
- Choosing an arbitrary split: Base the ratio on budget stress tests, prepayment goals, and savings patterns.
- Over-fixing during volatile times: A modest fixed slice can provide stability without overcommitting.
- Not using features: An offset or redraw you don't use is just marketing; align the product with your behavior.
Worked Example: Putting It Together
Case: $700,000 loan, 30 years. Borrower expects to stay 4-5 years, can maintain $25,000 in savings, wants to prepay ~$10,000 per year, and worries about near-term rate rises.
Possible approach:
- Split 60% fixed ($420k) for 3 years; 40% variable ($280k) with offset.
- Rationale: Fixed share anchors most repayments against rises. Variable share handles extra payments and offset savings. If they sell or refinance in 4-5 years, only the fixed portion risks break costs, and a 3-year term reduces that risk window.
- Behavior: Direct salary and savings to the offset on the variable side; use surplus to make extra repayments there. Calendar a reminder 90 days before the fixed term ends to refix or refinance.
Decision Framework You Can Use Today
Ask yourself:
- Budget: How much repayment movement can I tolerate monthly? Fix that portion.
- Flexibility: How much do I plan to prepay or redraw? Keep that portion variable.
- Savings: Do I hold meaningful cash? Ensure it offsets the variable slice.
- Timeline: Will I move, sell, or renovate soon? Shorten or shrink the fixed slice.
- Market view: If I'm wrong about rates, does my split still feel livable?
Actionable Next Steps
- Get comparable quotes: Collect fixed terms (1-5 years) and variable offers with offsets. Note revert rates, fees, and extra repayment rules.
- Run three scenarios: Stable rates, +1.5% rise, -1% fall. Compare total 3-5 year costs for all-fixed, all-variable, and a couple of split ratios.
- Choose a disciplined split: Example starting points-50/50 for balanced hedge; 60/40 fixed for more stability; 40/60 fixed for more flexibility.
- Align behavior: Funnel savings to the offset on the variable side; direct extra repayments there first. Avoid extra payments beyond caps on the fixed side.
- Set calendar reminders: 90 days before the fixed term ends, review options. If rates fall mid-term and you want out, request a break-cost quote before acting.
Bottom Line
A fixed rate buys stability; a variable rate buys flexibility. Splitting a home loan lets you hold both-anchoring part of your repayments while keeping room to prepay, offset, and refinance with less penalty risk. The right mix hinges on your budget, plans, and how you actually use money day to day. Model a few scenarios, pick a deliberate split, and set reminders to review before your fixed term rolls off. That's how you keep control when the rate weather changes.