In short: A fixed rate locks your interest rate and repayment for one to five years, giving certainty but limiting extra repayments, offset access and your ability to refinance without break costs. A variable rate moves with the market, usually comes with a full offset account and unlimited extra repayments, and is cheaper to leave. Many Melbourne borrowers split the loan to get some of both.
Choosing between fixed and variable is less about predicting where the Reserve Bank goes next and more about how much certainty you need, how you plan to use the loan, and how likely you are to sell, refinance or pay it down quickly. This guide walks through the trade-offs with real dollar figures, so you can decide with your eyes open rather than guessing.
How fixed and variable rates actually work
Fixed rate
You agree a rate with the lender for a set term, most commonly one, two or three years, sometimes up to five. Your repayment is identical every month until the term ends. At expiry, the loan rolls onto the lender's standard variable rate, which is often higher than what a new customer is offered, so the expiry date is a moment to renegotiate or refinance.
Variable rate
Your rate can change at any time. Lenders typically move it in line with the RBA cash rate, but they also reprice independently based on funding costs and competition. Repayments rise and fall with the rate. In return you normally get a 100% offset account, unlimited extra repayments, free redraw and no exit penalty beyond a discharge fee.
Split loan
You divide one loan into two portions, for example 50% fixed and 50% variable. The fixed portion gives repayment certainty; the variable portion carries the offset account and absorbs your extra repayments. Splits are common in Melbourne's growth suburbs where households want a predictable core repayment but still expect to save aggressively.
Fixed vs variable at a glance
| Feature | Fixed rate | Variable rate |
|---|---|---|
| Repayment certainty | Yes, for the fixed term | No, moves with rates |
| Extra repayments | Usually capped ($10,000–$30,000 per year) | Unlimited |
| 100% offset account | Rare; some lenders offer partial or none | Standard on most packaged loans |
| Redraw | Often restricted during the term | Usually free and available |
| Break costs if you refinance, sell or pay out early | Yes, can be large if rates have fallen | No (discharge fee only, typically $150–$400) |
| Benefit if rates fall | None until expiry | Immediate lower repayments |
| Protection if rates rise | Full protection for the term | None |
| Rate at expiry | Reverts to lender's variable rate | Not applicable |
What the difference looks like in dollars
Suppose you are buying a four-bedroom house in Craigieburn for $750,000 with a $150,000 deposit, borrowing $600,000 over 30 years, principal and interest. Rates below are for illustration only.
| Rate (p.a.) | Monthly repayment on $600,000 | Difference vs 6.00% |
|---|---|---|
| 5.50% | $3,407 | −$190 per month |
| 6.00% | $3,597 | Baseline |
| 6.50% | $3,792 | +$195 per month |
| 7.00% | $3,992 | +$395 per month |
A half-percent rate move on a $600,000 loan is roughly $190–$195 per month, or about $2,300 a year. That is the scale of the "bet" you are making either way. If you fix at 6.00% and variable rates drop to 5.50% within a year, you pay about $190 more per month than you needed to for the rest of the term. If rates rise to 6.50% instead, you save the same amount. Use the mortgage repayment calculator to run your own numbers.
Worked example: a split loan in Wollert
A couple buying a new build in Wollert borrow $600,000. They split it: $300,000 fixed for two years at 5.80% and $300,000 variable at 6.10%, for illustration.
| Portion | Rate | Monthly repayment | Features |
|---|---|---|---|
| Fixed $300,000 | 5.80% | $1,760 | Certainty; extra repayments capped at $20,000 per year |
| Variable $300,000 | 6.10% | $1,818 | 100% offset; unlimited extra repayments |
| Total | Blended ~5.95% | $3,578 |
They keep their savings and salary in the offset against the variable half. If they hold $30,000 in the offset, they are only charged interest on $270,000 of the variable portion, and their effective rate across the whole loan drops further. If rates rise, only half the loan is exposed. If rates fall, half the loan benefits straight away. Model your own split with the split loan calculator.
When fixing makes sense
- Your budget is tight. If a $200-a-month rise would genuinely hurt, certainty is worth paying for. This is common for first home buyers stretching to buy a house-and-land package in Mickleham or Sunbury on a single income.
- You are on a fixed income or contract. Predictable outgoings matter more than potential savings.
- The fixed rate is meaningfully below variable. Lenders sometimes price two- or three-year fixed rates below their variable rate when they expect rates to fall. Locking in a lower rate for certainty is a reasonable trade if you don't need flexibility.
- You plan to hold the property and loan unchanged for the whole term. No sale, no refinance, no major lump-sum repayment.
When variable makes sense
- You have irregular or lumpy income such as bonuses, overtime or self-employed earnings and want to dump surplus cash into the loan without limits. See our self-employed home loan guide.
- You want a full offset account. For most households with decent savings, the offset saving outweighs a slightly higher headline rate. Read offset vs redraw for how much it can be worth.
- You might sell, refinance or restructure within a few years. Break costs can wipe out years of savings.
- You expect rates to fall. If you have a view that the cash rate is heading down and you can absorb a rise in the meantime, variable lets you capture every cut.
- You want to refinance freely. Lenders compete hard for refinance business, and being on a variable rate means you can move whenever a better deal appears. See refinancing.
Break costs: the fixed-rate trap
A break cost (sometimes called an early repayment adjustment) is charged if you end a fixed term early by refinancing, selling, or repaying more than the annual cap. It is not a penalty in the ordinary sense; it is the lender recovering the "economic cost" of the funding they locked in on your behalf.
The cost is driven by three things:
- How far rates have fallen since you fixed. If wholesale rates have dropped, the lender loses money re-lending your funds and passes that on. If rates have risen, the break cost is often nil.
- How much of the term is left. Breaking a five-year fix after six months costs far more than breaking with six months to go.
- The loan balance.
For illustration: on a $600,000 loan fixed for three years, if wholesale rates fall 1.00% and you break with two years remaining, the break cost is broadly in the order of $12,000 (1.00% × $600,000 × 2 years). Actual formulas vary by lender and use wholesale swap rates rather than advertised rates, so always request a quote before acting. Our guide on breaking a fixed-rate loan covers how to get that quote and when paying it is still worth it.
Rate lock: protecting the rate between application and settlement
If you apply for a fixed rate, the rate you get is usually the rate on the day of settlement, not the day you applied. If the lender raises fixed rates in between, you pay more. A rate lock fee (typically 0.10–0.15% of the loan, so $600–$900 on $600,000) holds the rate for 60–90 days. It is worth considering when you are buying off the plan or a house-and-land package with a long lead time. Ask us before you commit; on a short settlement the fee rarely pays for itself.
Questions to ask yourself before you decide
Use this checklist honestly:
- Could I comfortably afford my repayment if rates rose by 1.00%? (Lenders already test you at your rate plus 3.00%, but comfort is different from approval.)
- Do I hold more than a few thousand dollars in savings that could sit in an offset?
- Is there any realistic chance I will sell, upgrade or refinance in the next three years?
- Do I receive lump sums (bonus, tax refund, inheritance) I would want to put into the loan?
- Would a 100% offset save me more than the fixed-rate discount would?
- Am I fixing because it is cheaper today, or because I need certainty regardless of price?
If you answered yes to the savings, lump-sum and "might sell" questions, lean variable or split. If certainty is the overriding issue, fix more of the loan.
Common mistakes
- Fixing the entire loan then coming into money. A $40,000 inheritance sitting in a savings account earning 4% while your fixed loan charges 6% and caps extra repayments at $10,000 is a costly mismatch. Keep a variable portion.
- Ignoring the revert rate. Some lenders advertise a sharp fixed rate then revert to a variable rate well above market. Check the comparison rate, and diarise the expiry date. Read comparison rate explained.
- Fixing right before you sell. If you are moving up from a Roxburgh Park townhouse to a Greenvale house within two years, do not fix for three.
- Chasing the lowest headline rate. A loan without an offset can be dearer than a slightly higher rate with one, once you account for your savings balance.
- Not comparing across lenders. Fixed pricing varies widely between lenders on the same day. A broker can see the whole panel; see our lenders.
- Forgetting the buffer. Whether fixed or variable, keep at least three months of repayments accessible.
How to make the final call
Start with certainty needs, then flexibility, then price. If you need certainty, fix a portion large enough that the fixed repayment covers your minimum comfortable budget, and keep the rest variable with an offset. If flexibility matters more, go fully variable and negotiate the rate hard. Either way, review the loan at each fixed expiry and at least every two years on variable. Our home loan service includes that review at no cost to you in most cases, and we compare fixed, variable and split options across our lender panel for your circumstances rather than a generic recommendation. The government's Moneysmart site also has a plain-English overview of loan features if you want a second, independent read.
Frequently asked questions
Can I break a fixed rate home loan early?
Yes, but you will usually pay a break cost if market rates have fallen since you fixed. The lender calculates its economic loss on the remaining term and charges it at discharge. If rates have risen, the break cost can be zero. Request a written break cost quote from your lender before refinancing or selling; the figure changes daily with wholesale rates.
Is it better to fix or stay variable in 2026?
There is no universal answer. Fixing suits borrowers who need certainty or who can lock a fixed rate below the variable rate for a term they will definitely see out. Variable suits borrowers with savings for an offset, lumpy income, or plans to sell or refinance within a few years. A split loan gives some of both and is the most common compromise we arrange for Melbourne buyers.
Can I make extra repayments on a fixed rate loan?
Usually only up to a cap, commonly $10,000 to $30,000 per year depending on the lender. Exceeding the cap can trigger a break cost. Some lenders allow no extra repayments at all during the fixed term. If paying down debt quickly matters to you, keep a variable portion for your extra repayments and use the fixed portion for certainty.
What happens when my fixed rate ends?
Your loan reverts to the lender's standard variable rate, often higher than rates offered to new customers. Repayments can jump significantly. Contact your lender or broker two to three months before expiry to negotiate a new fixed rate, request a variable discount, or refinance elsewhere. Doing nothing is the most expensive option.
Do fixed rate loans have offset accounts?
Rarely a full one. Most fixed loans offer no offset, or a partial offset that only credits a fraction of the balance. A handful of lenders offer a 100% offset on fixed terms, typically at a higher rate. If an offset is important, keep a variable split and attach the offset to that portion.
Is a split loan a good idea?
For many owner-occupiers, yes. It reduces the risk of guessing wrong on rates, keeps a variable portion for offset and extra repayments, and locks a core repayment for certainty. The downsides are slightly more paperwork and, at fixed expiry, the need to review two portions. Most lenders allow splits at no extra cost.
Talk to GNT Finance
Fixed, variable or split is a decision that should reflect your income, savings and plans, not a coin toss on where rates go. Gorakh Timilsina and the GNT Finance team compare fixed and variable pricing across our lender panel and structure the loan around how you actually live. Book a free consultation or call 0426 403 703 to talk it through.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.