Quick answer
A fixed rate loan locks in your interest rate for a set period, usually one to five years according to Moneysmart, so repayments stay the same. A variable rate loan can move up or down, but often allows extra repayments and features like offset accounts. Fixed offers certainty, variable offers flexibility, and a split loan combines both.
Key points
- Fixed gives repayment certainty for the term, but you do not benefit if rates fall.
- Variable can change at any time, but usually allows extra repayments and offset or redraw.
- Moneysmart warns that breaking a fixed loan early may trigger a break fee.
- At the end of a fixed term, loans usually revert to the lender's variable rate.
What is a fixed rate loan?
On a fixed rate loan, the interest rate is set for an agreed period and does not change during that time. Moneysmart says the usual fixed period runs from one to five years. Because the rate cannot move, your repayments stay the same for the fixed term, which makes budgeting simple.
The trade-off is that you do not benefit if rates fall during the fixed period. There can also be restrictions: Moneysmart notes that extra repayments may be limited, and some fixed loans do not come with an offset account.
What is a variable rate loan?
With a variable rate loan, the lender can change the rate over time. Moneysmart says changes may follow the Reserve Bank’s cash rate but can also happen for other reasons, which is a useful reminder that a lender’s rate does not move only with the headlines.
Variable loans often allow extra repayments, redraw and offset accounts, and make switching or refinancing easier. The downside is that repayments can rise unexpectedly, which makes budgeting harder if your finances are tight.
How do they compare side by side?
| Feature | Fixed | Variable |
|---|---|---|
| Rate during the term | Stays the same | Can rise or fall |
| Repayments | Predictable | May change |
| Extra repayments | Often capped | Often allowed |
| Offset account | Sometimes unavailable | Often available |
| Leaving early | May trigger a break fee | Usually simpler |
| Benefit if rates fall | None until the term ends | Possible |
| Protection if rates rise | Yes, during the term | No |
Neither is right for everyone. The choice depends on how much certainty you need, how much flexibility you want and how long you plan to hold the loan.
What is a break fee and why does it matter?
Moneysmart says breaking a fixed rate loan early, whether by switching, selling or paying it off, may trigger a break fee. It matters because plans change. A sale, a refinance or a windfall can all end a loan sooner than expected. If you think there is a decent chance you will sell or refinance during the fixed period, ask the lender for an explanation of how any break cost works, and ask for a worked estimate before you sign.
What happens when the fixed term ends?
Moneysmart explains that the loan usually reverts to the lender’s variable rate, often called the revert rate, unless you switch loans or choose another fixed period. Do not wait until the last week. Review your options a few months before the term ends: compare what your lender offers, ask whether they will match a better deal and talk to a broker about a refinance. Our home loan refinance page covers that process.
What is a split loan?
A split loan divides your borrowing into a fixed part and a variable part. Moneysmart notes it can give some certainty on the fixed part and flexibility on the variable part, but it can be more complicated, as each part may have its own fees, features and conditions. If you are considering one, ask which part can link to an offset account and what happens to the fixed portion when its term ends. Our page on fixed and variable home loans goes through those choices, and the guide to offset versus redraw explains the variable-side features.
Does this apply to business, rural and commercial loans?
Yes, though the detail differs. Business, farm and commercial lenders may offer fixed periods, variable structures or a mix, and some loans have different features or fee structures to home loans. Seasonal cash flow can make certainty valuable for a farmer, while a growing business may want the freedom to repay early. See our pages on business loan refinance, rural refinance and commercial loan refinance for how refinancing works in each area.
Private and short-term loans are typically structured differently again, with a fixed term and a clear repayment event rather than a long reversion cycle.
How do I decide?
A few questions to ask yourself:
- How tight is my budget? If a small rise in repayments would cause stress, certainty has value.
- Do I plan to pay the loan down faster? If yes, flexibility and offset matter.
- Might I sell or refinance in the next few years? If yes, check break costs.
- How long do I want certainty? Match the fixed period to your plans.
- Could I handle a significant rise in repayments? Moneysmart suggests testing your budget against a rise of several percentage points.
None of this is personal advice. It is a framework to talk through with a broker who can see your numbers.
An illustrative example
This is an illustrative scenario with no real names.
A self-employed couple has patchy income across the year. They like predictable repayments for part of their loan but also want to use spare cash in busy months to cut the balance. A split loan lets them fix one part for certainty and keep the other variable with an offset account.
When the fixed part nears its end, they check the revert rate, compare options and decide whether to refix or move. The structure suits them because it matches how their income actually arrives.
What mistakes should I avoid?
- Fixing without checking extra repayment limits.
- Ignoring break costs when plans might change.
- Forgetting the revert rate at the end of the term.
- Choosing a structure only because of a headline rate.
- Assuming variable always saves money or fixed always protects you.
- Not reviewing the loan once a year.
How does Ownright help?
We compare structures across lenders, explain the features that matter and match the loan to your plans. Trevor Scott and the team work with borrowers Australia-wide, including people whose circumstances are more complicated than a standard application. If a fixed term is about to end, get an enquiry started before the revert rate kicks in.
Ready to choose a loan that fits your plans?
Sounds like you are looking for a loan with the right balance of certainty and flexibility. We are the lending experts in fixed, variable and split structures across home, business and rural lending, so click the button and see if you qualify.
Frequently asked questions
What is the difference between fixed and variable?
A fixed loan holds the same interest rate for an agreed period, so your repayment is predictable. A variable loan's rate can rise or fall at the lender's discretion, so repayments may change. Fixed suits people who value certainty, while variable suits those who want flexibility and features such as offset accounts.
What is a break fee?
It is a cost that may apply if you pay off, switch or sell during a fixed term, because the lender may lose out when you leave early. Moneysmart says breaking a fixed loan early may trigger such a fee. Ask your lender how it is calculated before you fix, since it can be significant.
What happens when my fixed term ends?
Moneysmart explains that the loan usually reverts to the lender's variable rate unless you switch lenders or choose another fixed period. Check the likely revert rate ahead of time, and talk to your lender or broker a few months before the term ends so you have options.
What is a split loan?
A split loan divides the debt into a fixed portion and a variable portion, in proportions you agree with the lender. It gives some repayment certainty plus some flexibility, though it can be more complex because each portion may have different fees, features and conditions.
Can I make extra repayments on a fixed loan?
Often only to a limit. Moneysmart says extra repayments on fixed loans may be limited and some fixed loans lack offset accounts. Variable loans more commonly allow unlimited extra repayments. If paying down debt early matters to you, check the cap before choosing a fixed term.