Fixed or variable — how to actually decide

Most fixed-versus-variable advice boils down to guessing where rates go next. You cannot do that reliably, and neither can the banks — which is worth remembering, because the bank is on the other side of your fixed rate and they price it to win.

A better framing: fixing buys certainty, and you pay for it in flexibility. The question is whether you need the certainty more than the flexibility.

What a fixed rate gives you

Your repayment does not move for the fixed term, usually one to five years. If your budget is tight, or you have just stretched to buy, that predictability has real value regardless of what rates do. Sleeping properly is a legitimate financial goal.

What it takes away

Fixed loans are deliberately restrictive:

• Extra repayments are capped. Many lenders allow only a few thousand dollars a year above the schedule. If you were planning to attack the principal, fixing blocks you.
• Offset accounts usually are not available, or only against the variable portion. If you hold a decent cash balance, losing the offset can cost more than the rate saving.
• Breaking the loan is expensive. Break costs are not a fixed penalty — they are calculated on the lender’s loss if wholesale rates have fallen since you fixed. They can run into five figures on a large loan. Sell the house, refinance, or come into money, and this becomes your problem.
• Redraw is often unavailable for the fixed term.

The revert rate trap

When the fixed term ends, the loan does not return to a competitive rate. It rolls onto the lender’s standard variable rate, which is typically well above what a new customer would be offered.

Lenders rely on inertia here. Diarise the end of your fixed term two months out and either renegotiate or refinance. Borrowers who let the revert rate ride for a year or two lose more than they ever saved by fixing.

Splitting

You do not have to choose. A split loan fixes part of the balance and leaves the rest variable — say 60% fixed and 40% variable. You get:

• partial repayment certainty
• an offset account against the variable portion
• uncapped extra repayments on the variable portion
• smaller break costs if you have to exit, since only the fixed slice is exposed

Splitting is the pragmatic answer for most borrowers who are genuinely torn. It is not fence-sitting; it is buying only as much certainty as you actually need.

A decision that holds up

Work through these in order.

1. Could you absorb a 2% rate rise? Run your loan through the repayment calculator at your current rate, then again 2% higher. If the higher figure breaks your budget, that is an argument for fixing at least part of the loan — not because rates will rise, but because you cannot survive it if they do.

2. Will you make large extra repayments in the next few years? If yes, stay variable, or keep enough variable to absorb them. Fixed caps will frustrate you.

3. Do you hold meaningful savings? An offset account against $60,000 of savings on a 6% loan saves roughly $3,600 a year in interest. That will usually beat a 0.2% fixed discount. Stay variable, or split.

4. Might you sell or refinance inside the term? Break costs make fixing a bad fit for anyone whose plans are unsettled — a job that might relocate, a house you might outgrow, a relationship in flux.

5. Only now, consider the rate itself. If fixed rates sit well below variable, the market is already pricing in cuts, and you are not getting the bargain it looks like. If fixed sits above variable, you are paying an explicit premium for certainty. Decide whether it is worth it.

The honest summary

Fixing is insurance. Sometimes insurance pays off and sometimes it does not, and that is not the test of whether buying it was sensible. Buy it if the outcome you are insuring against would genuinely hurt you. Skip it if you can ride out a rise and want the flexibility to pay the loan down faster.

If you cannot decide, split it. That is the answer more often than either extreme.