Fixed vs Variable Home Loan (or Split Loan?) Find Which is Best for You

The three main types of home loans you can choose from when buying a home are fixed-rate, variable rate and split-rate loans. Each comes with its own pros and cons, and the choice you make can have a significant impact on your financial future. Fixed-rate mortgage loans give you stable repayments, while variable loans offer more flexibility if your situation changes. Split loans, as the name suggests, give you a mixture of the two. In this guide, we’ll explain how the main loan types work so you can decide which one is right for you.

Want to understand how fixed, variable, or split loans factor into your borrowing capacity? Check out the top 10 list of local mortgage brokers for your area:

• Best Mortgage Broker Sydney
• Best Mortgage Broker Melbourne
• Best Mortgage Broker Brisbane

“It’s crucial to seek advice on whether to fix your interest rate or keep it variable, as timing plays a key role. It’s a good idea to consult multiple brokers to get their insights on market trends. A skilled mortgage broker will be able to inform you about what lenders are currently doing and their future plans. The 1, 2, and 3-year fixed-rate market often provides a good indication of where a bank expects variable rates to go.”

– Mansour Soltani, Soren Financial

What is a Fixed Rate Home Loan?

It sounds like a fixed-rate loan: your interest rate is locked in for a set period, usually between one and five years. This fixed-rate period means your repayments stay precisely the same during that time. No matter what happens to the RBA’s cash rate or broader market conditions, your rate is unaffected.

Example: Imagine you take out a $500,000 home loan with a fixed rate of 5% for three years. Your monthly repayments are about $2,684. If interest rates rise to 6%, your repayments stay the same, protecting you from higher costs. But if rates drop to 4%, you won’t benefit – you’ll keep paying 5%. Fixed loans give you predictability but lock you into the agreed rate, which could be a drawback if circumstances change.

Advantages and Disadvantages of Fixed Rate Loans

Fixed-rate loans come with their own set of benefits and challenges. Here’s a breakdown to help you figure out if they’re the right choice for you:

Advantages of Fixed Rate Loans

1. Predictable Repayments

With a fixed-rate loan, your repayments stay the same for a fixed period. This makes it easy to budget your monthly payments and plan ahead. This can be a big win if you want to know exactly what’s coming out of your account each month.

2. Protection Against Rate Hikes

Your fixed rate won’t change, even if market rates go up. While others may face higher repayments on interest loans – as was the case during the recent interest rate rises – you’ll be sitting comfortably with the same rate. It’s like having a safety net during uncertain times.

3. Financial Stability

Fixed loans provide peace of mind. Knowing your loan repayments won’t suddenly increase can make managing your finances less stressful. If you’re buying your first home or working with a tight budget, this sense of security might be worth any drawbacks.

Disadvantages of Fixed Rate Loans

1. Break Costs

Fixed loans can sometimes feel like a “golden cage” – safe but restrictive. You’ll face break costs if you want to refinance, sell your home, or change your loan before the fixed period ends. These fees can be steep, sometimes costing tens of thousands of dollars.

2. Limited Flexibility

Fixed loans usually cap how much extra you can make additional repayments each year, often between $10,000 and $20,000. If you want to pay off your loan as fast as possible, you may get a significant pay raise or inherit a large amount of money, but this limit might hold you back.

4. No Offset Accounts

Most fixed loans don’t offer offset accounts. An offset account can reduce your interest by linking a savings account to your loan. Without this feature, you might miss out on savings and have fewer options for managing your mortgage.

5. No Benefit from Rate Drops

If interest rates fall, your repayments won’t budge. While others will enjoy lower rates and have more money left over each month, you’re locked in. It can be frustrating if you feel like you’re missing out on potential savings you could be spending elsewhere, like a holiday or a new car.

Who Are Fixed Loans Best For?

Fixed loans are outstanding for borrowers who value stability and want to lock in their interest rates. Here’s who they suit best:

• Families on a Tight Budget: When every dollar counts, knowing exactly what your monthly repayments will be can be a lifesaver. A fixed loan takes the guesswork out of budgeting.
• First-Home Buyers: If you’re buying your first home, you must be aware of a lot of information. A fixed loan gives you one less thing to worry about by locking in predictable repayments while you adjust to the costs of owning a home.
• Investors with Fixed Rental Income: If you rely on steady rental income to cover your mortgage, a fixed rate ensures your repayments align with your cash flow, protecting you from sudden rate hikes.
• Borrowers Expecting Rising Rates: When rates rise, fixing your loan now can shield you from higher repayments later. It’s like locking in today’s price before the cost goes up.

What Is A Variable Rate Home Loan?

A variable-rate home loan is the opposite of a fixed-rate loan. You don’t lock in your interest rate when you choose a variable loan. Instead, you’re at the mercy of changes in the market. 

Your interest rate, fixed or variable, will rise or fall depending on the RBA’s adjustments to the official cash rate and how your lender responds. While a variable rate offers flexibility and potential savings, it also comes with uncertainty.

Example: Say you take out a $500,000 home loan with a variable rate of 5%. Initially, your monthly repayments are roughly $2,684. However, if RBA raises the rate to 6% and your lender does, your repayments will increase to approximately $3,000. This could strain your budget and leave you in mortgage stress. However, if the rate drops to 4%, your complete interest repayments will decrease to around $2,387, saving you money. This highlights the risk vs reward nature of a variable-rate home loan.

The Advantages and Disadvantages of Variable Rate Home Loans

With variable-rate loans, you’re often balancing flexibility with unpredictability. Here’s a breakdown of the advantages and disadvantages to decide if they’re right for you:

Advantages of Variable Rate Loans

1. Flexibility of Repayments

Variable loans offer greater flexibility than fixed-rate loans when making extra repayments. By making extra repayments without break costs, you could pay off your loan faster and reduce your interest payments throughout the loan.

2. Access to Offset Accounts

An offset account can significantly reduce your loan’s interest. By depositing savings into this account, you pay interest only on the difference. For example, if you owe $500,000 but have $50,000 in your offset account, you only pay interest on $450,000.

3. Redraw Facilities

Many variable-rate loans offer a redraw facility. This means you can redraw your extra repayments if you have unexpected expenses you need to cover. This is great because the extra repayments reduce interest while you’re ahead and provide financial flexibility if you need it.

Disadvantages of Variable Rate Loans

1. Unpredictability

With a variable interest rate or loan, your financial situation is at the mercy of the market. When interest rates rise, your repayments may increase significantly, putting you under financial pressure. This uncertainty makes budgeting more challenging, especially for families or retirees relying on fixed incomes.

Pro Tip: To mitigate these risks, always budget for a potential rate rise of 2–3% and keep a financial buffer on your mortgage for any unexpected rate changes.

2. When Lenders Don’t Pass On Savings

Just because the RBA lowers the cash rate doesn’t guarantee your home loan interest rate will decrease. Your lender will either choose to pass on the interest rate cut, pass on a partial cut, or keep your rate the same. It depends on a range of factors, such as strategy, market competition, funding costs, and the economy’s overall condition.

History shows banks don’t always pass on rate cuts in full, especially when multiple rate cuts are in quick succession. For example, during the 2019 – 2020 cycle, none of Australia’s Big Four banks passed on the complete rate reductions to customers.

Who Benefits Most from Variable Loans?

Variable rates make sense if you are happy to accept uncertainty as a trade-off for flexibility. Here are a few scenarios where a variable loan might work for you:

• Savvy Borrowers with Discipline: If you’re confident you will use the extra repayment feature, a variable-rate loan will enable you to pay off your mortgage faster.
• Borrowers Anticipating Rate Decreases: Do you expect the RBA to cut interest rates over the next few years? You may prefer a variable loan, so your repayments drop if interest rates go down.
• Short-term Homeowners: A variable loan offers flexibility without the high break costs if you plan to sell or refinance within a few years.
• Borrowers with a Financial Buffer: With sufficient savings, you can comfortably manage potential rate rises while benefiting from features like extra repayments, offset accounts, and redraw facilities that variable rate loans provide.

What is a Split Loan?

As you might guess from the name, a split home loan “splits” your mortgage into two portions. One portion has a fixed interest rate, and the other has a variable rate. That way, some repayments are locked in for stability, while the rest fluctuates based on market rates.

Example: Let’s say you take out a $500,000 loan and decide to split it 50/50. Half of your loan ($250,000) is fixed at 5% for three years, while the other half ($250,000) has a variable rate starting at 4.5%. Your fixed portion provides predictable repayments, safeguarding you if rates rise. Meanwhile, the variable side lets you benefit if rates drop and gives you the flexibility to make extra repayments or access an offset account.

Want to calculate your repayments on a split loan? Use our split loan calculator.

Advantages and Disadvantages of Split Rate Loans

Split loans offer a mix of security and flexibility, but they can be more complex to manage. Here’s a closer look at the pros and cons to help you decide if it’s the right option for you:

Advantages of Split Rate Loans

1. Balanced Risk

Splitting your loan reduces the risk of rate hikes hitting your entire repayment. While the fixed portion remains steady, the variable part can benefit if rates drop. It’s a “best of both worlds” approach that can be a good option if rates go up and down like a yo-yo.

2. Customisation

You control how much to fix and how much to leave variable. Whether it’s a 70/30 split or an even 50/50, you can match the split with your financial situation and how much risk you want to take.

3. Flexibility on the Variable Side

The variable portion of your loan gives you wiggle room to make extra repayments, access redraw facilities or even link an offset account. This can help you pay off your loan faster and gives you more flexibility in managing your finances.

Disadvantages of Split Rate Loans

1. Higher Fees

Split loans often come with higher fees than single-rate loans. These added costs can eat into the savings you might gain from splitting.

2. Complexity

Managing two loan portions with different rates and repayment structures can get tricky. You’ll need to stay on top of your repayments and understand how changes in the variable interest rate environment impact your budget.

3. Limits on the Fixed Portion

The fixed part of your loan still has restrictions, like break costs and caps on extra repayments. So, while the variable side gives flexibility, the fixed side might feel slightly rigid.

Who Are Split Loans Best For?

Split loans are outstanding for borrowers who want the benefits of both fixed and variable rates. Here’s who they suit best:

• Borrowers Who Want Balance: If you like protecting part of your loan from rising interest rates but still want to take advantage of rate cuts, a split loan offers the perfect middle ground.
• Families With Evolving Financial Goals: If you’ve a growing family, your financial situation will be very different in just a few years. A split loan can give you stability for some of your repayments and the freedom to pay down the variable portion faster when you have extra cash.
• Investors Seeking Risk Management
• Split loans can be outstanding if you want to buy an investment property. The fixed portion gives you predictability for managing rental income, while the variable side allows flexibility for making extra repayments or adjusting to market changes.

Key Takeaways: Fixed, Variable, or Split?

Ultimately, deciding between a fixed-rate home loan, variable-rate home loan, or split-rate home loan depends on your financial goals, risk tolerance, and personal financial circumstances alone. Here’s a quick recap:

• Fixed loans: Great for stability but come with limited flexibility and high break costs.
• Variable loans: Offer flexibility and savings when rates fall but require a risk tolerance.
• Split loans: Provide a middle ground but can be complex and slightly more expensive.

Compare Home Loans Using Our Free Calculators

If you want to break down the numbers of each loan to help you make the decision, home loan calculators are an invaluable tool. They provide automated calculations that reveal whether you’re better off over time depending on interest rates, type of loan, and loan term.

Our website offers free calculators, including our split loan calculator, loan repayment calculator, loan comparison calculator, and more, to make math easy.

Conclusion

Choosing between a fixed, variable, or split-rate home loan is a crucial decision that could affect your mortgage by tens of thousands of dollars. Each type of loan has advantages and trade-offs, which you should align with your short, medium, and long goals.

If you’re unsure, speak to a mortgage broker who can advise you based on your situation. They’ll get to know you and your goals and provide a range of suitable home loan options for you to choose from. Find an experienced local broker in your area using the top 10 lists below: 

• Best Mortgage Broker Sydney
• Best Mortgage Broker Melbourne
• Best Mortgage Broker Brisbane

FAQs: Fixed vs Variable vs Split Home Loan

1. What is the main difference between fixed, full vs variable home, and split home loans?

The key difference between a fixed-term loan and a variable home loan lies in how the interest rate behaves over time:

• Fixed Home Loans: The interest rate is locked in for a specified period, typically 1–5 years. Your repayments remain consistent, regardless of market changes.
• Variable Home Loans: The interest rate fluctuates based on the RBA cash rate and market conditions. Your repayments can increase or decrease over time.
• Split Home Loans: Your loan is divided into two portions: a fixed interest rate and a variable rate.

2. Which loan is the best for me?

The best loan type depends on your financial goals, risk tolerance, and lifestyle. Fixed loans offer stability, variable loans provide flexibility, and split loans combine both.

3. What happens to my repayments if interest rates rise or fall?

The impact of rate changes depends on whether you have a fixed or variable loan.

• With a fixed loan, your repayments remain the same.
• With a variable loan, your repayments will increase and decrease if rates fall.
• With a split loan, only the variable portion of your loan will change if rates rise or fall.

4. Can I switch between fixed and variable home loans now and split loans later if my circumstances change?

You can switch between fixed, variable and split loans, but it’s not always straightforward or cost-effective. You’ll likely face break costs if you switch from fixed to variable or split. Switching from fixed vs variable home to fixed or split loans may have fewer costs but could be subject to timing restrictions based on your lender’s policy. To change, you must provide financial documents and meet your lender’s criteria for the new loan structure.

5. Are there extra costs involved with fixed, variable, or split loans?

Each loan type can come with different fees:

• Fixed loans may have break costs if you end your fixed term early.
• Variable loans can include ongoing fees and higher interest rates depending on the lender.
• Split loans may have additional fees for managing the two portions of the loan.

Check with your lender for a full breakdown of fees before deciding.

6. Do all lenders offer all types of loans?

No, not all lenders offer every type of loan. Most lenders provide fixed and variable loans, but not all offer split loans – or, if they do, they may have specific terms and conditions. Loan features such as offset accounts, redraw facilities, or repayment flexibility vary widely between lenders. This is where a mortgage broker can help you compare loans across lenders to find one that suits your preferences.