How variable rate loans work
A variable rate moves with the market, and with it, most of the flexibility that makes a loan easier to live with. A 100% offset account linked to a variable loan reduces the daily interest calculation by whatever's sitting in the offset. Every dollar in there earns the equivalent of your loan rate, tax-free. You can generally make unlimited extra repayments and redraw them if you need to, without the restrictions that come with a fixed term.
Variable rates currently sit around 5.60% to 5.90% (April 2026), and they move with decisions from the Reserve Bank. The RBA has raised the cash rate twice in 2026, to 3.85% in February and 4.10% in March, driven by renewed inflationary pressure in the second half of 2025. The market is currently pricing in a possible move to 4.35% in May, with the RBA board reportedly split five to four on the decision.
How fixed rate loans work
A fixed rate locks your repayment for a set term, typically one to five years, insulating you from rate rises during that period. The trade-off is that you generally lose access to offset, unlimited extra repayments and redraw for the life of the fixed term, and if you need to break the fixed period early, you may be charged a break cost.
It's worth understanding how fixed rates are actually priced. Lenders set them based on bank bill swap rates and bond market pricing, which build in the market's expectations of future rate movements. When the market expects rates to rise, fixed rates tend to be priced above current variable rates to reflect that expectation. Which means fixing isn't a way to beat the market. It's a way to buy certainty, and the market has usually already priced that certainty into the rate you're offered. Two-year fixed rates currently sit around 6.20% to 6.60%, noticeably above the variable range.
Understanding break costs
If you fix your rate and then need to exit early, whether you're selling, refinancing, or just want more flexibility, you may be charged a break cost. The formula is roughly: loan balance multiplied by the rate differential, multiplied by the remaining term in years. On a $600,000 balance with a 1.5% rate gap and two years remaining, that works out to approximately $18,000.
The direction of rates matters enormously here. If rates rise after you've fixed, your break cost is typically zero or minimal, since the bank isn't losing anything by letting you out early. If rates fall after you've fixed, your break cost can run anywhere from $10,000 to $50,000 or more, since the bank has locked in a rate now worth more to them than the market rate. This asymmetry is the single biggest risk in fixing: you're most likely to want out of a fixed loan exactly when it would cost you the most to do so.
Split loans: the hybrid option
You don't have to choose one or the other. A split loan divides your mortgage between a fixed and a variable portion, letting you fix part of your repayment for certainty while keeping the rest variable for flexibility, offset access and extra repayments.
As an example, a $700,000 loan might be split 60/40, with $420,000 fixed and $280,000 variable. You get partial protection against rate rises on the fixed portion, while retaining offset and unlimited extra repayments on the variable portion. It's a genuinely useful middle ground for borrowers who can't decide, or who want some of both.
What variable and fixed each offer, side by side
Variable loans currently run 5.60% to 5.90%, come with full offset account access, allow unlimited extra repayments, and offer a redraw facility with no break costs, since there's no fixed term to break. They tend to suit borrowers who want maximum flexibility, who expect to pay down their loan faster than scheduled, or who think rates are more likely to fall than rise.
Two-year fixed loans currently run 6.20% to 6.60%, generally don't offer offset accounts, cap extra repayments (often around $10,000 to $30,000 a year depending on the lender), still allow redraw in some cases, and carry break costs if you exit early. They tend to suit borrowers who want repayment certainty for budgeting, who are risk-averse to rate rises, or who don't expect to need the offset and extra repayment flexibility during the fixed term.
What the current rate environment means for your decision
With variable rates around 5.60% to 5.90% and two-year fixed rates around 6.20% to 6.60%, fixing today means paying a premium of roughly 0.30% to 1.00% upfront, in exchange for certainty. Whether that certainty is worth the premium depends on your own risk tolerance and how confident you are in your read on where rates are headed, not on any guarantee that fixing will save you money.
Who tends to suit which
Variable tends to suit borrowers who value the offset account and want every dollar of savings working to reduce their interest, who plan to make extra repayments or expect a windfall (bonus, inheritance, sale of another asset) they'll want to put against the loan, who might sell or refinance within the next few years and don't want to risk a break cost, or who are simply more comfortable riding out rate movements than paying a premium to avoid them.
Fixed tends to suit borrowers who want to know exactly what their repayment will be for budgeting purposes, who are risk-averse and want certainty even if it costs slightly more on average, who don't expect to need offset or heavy extra repayments during the fixed term, or who are confident they won't need to break the loan early.
Questions to ask yourself before deciding
How would a 1% rate rise affect your budget, and could you comfortably absorb it? How likely are you to sell, refinance, or make a lump sum repayment in the next two to five years? How much do you value the offset account, realistically, based on how much you typically hold in savings? And how much certainty is worth paying for, in your own terms, not in a generic sense?
Why a broker makes this decision easier
A broker isn't trying to sell you a fixed or a variable product, the way a single bank's staff might be nudged towards whatever suits that bank. A broker can model your specific numbers, including what a rate rise or fall would actually do to your repayments under each scenario, compare fixed and variable pricing across more than 50 lenders rather than one bank's shelf, and help you structure a split loan if that's the better fit, rather than forcing a binary choice.
Frequently asked questions
Should I fix my home loan in 2026? Whether to fix depends on your personal circumstances rather than a view on where rates will go. Even if you expect further rises, fixed rates already reflect the market's expectation of those rises, so fixing isn't guaranteed to produce a lower total interest cost than staying variable.
What's the difference between a fixed and variable home loan? A variable rate moves with the market and offers full flexibility, offset, extra repayments, redraw. A fixed rate locks your repayment for a set term in exchange for reduced flexibility and potential break costs. A split loan combines both.
What happens when my fixed rate expires? Your loan automatically rolls onto the lender's standard variable rate, which is typically not the most competitive variable rate available. It's worth reviewing your options 60 days before the fixed term ends rather than letting it roll over by default.
How is a break cost calculated? Roughly, your loan balance multiplied by the rate differential between your fixed rate and the current market rate, multiplied by the remaining term in years. It can range from close to zero if rates have risen since you fixed, to tens of thousands of dollars if rates have fallen.
Can I have both fixed and variable on the same loan? Yes, this is a split loan, and it's a common and genuinely useful structure for borrowers who want some certainty and some flexibility.
Is a variable rate home loan better than fixed? Neither is universally better. The right choice depends on your circumstances, your risk tolerance, your plans for the property, and how much you value the offset account and flexibility features.
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