Fixed vs Variable Rates: Making the Right Choice in 2026

The fixed vs. variable decision is one of the most debated topics in home lending. With interest rates having moved significantly in recent years, making the right choice has never been more important. This guide will help you understand both options and make an informed decision for your circumstances.

Understanding Variable Rate Loans

How Variable Rates Work

Variable rate loans have interest rates that can change at any time:

• RBA cash rate changes: Often (but not always) passed on
• Lender discretion: Banks can change rates independently
• Market conditions: Funding costs affect rates
• Competition: Lenders may discount to attract customers

Variable Rate Advantages

Flexibility:

• Make unlimited extra repayments without penalty
• Access to offset accounts (major benefit)
• Redraw facilities fully available
• Refinance any time without break costs

Potential Savings:

• If rates fall, you benefit immediately
• Often lower than fixed rates when yield curve is steep
• Can negotiate better rates with your lender
• Access to cashback and switching offers

Features:

• Full offset account functionality
• Split loan options
• Portability when moving
• No restrictions on paying off early

Variable Rate Disadvantages

Uncertainty:

• Repayments can increase unexpectedly
• Budgeting is more difficult
• Stress when rates rise
• No protection against rate cycles

Rate Creep:

• Your rate may not fall as much as official rates
• Existing customers often pay more than new customers
• Need to actively manage and negotiate
• Requires regular monitoring

Understanding Fixed Rate Loans

How Fixed Rates Work

Fixed rate loans lock in your interest rate for a set period:

• Common terms: 1, 2, 3, 4, or 5 years
• Rate determined by: Wholesale funding markets, not RBA cash rate
• At expiry: Usually reverts to bank's standard variable rate
• Certainty: Your rate won't change during the fixed period

Fixed Rate Advantages

Certainty:

• Know exactly what your repayments will be
• Protection against rate rises
• Easier budgeting and planning
• Peace of mind during volatile periods

Current Market Benefit:

• If you fix at a low point, savings can be substantial
• Protection if you believe rates will rise
• Competitive fixed rates in current market
• Can lock in for up to 5 years

Fixed Rate Disadvantages

Inflexibility:

• Limited extra repayments (typically $10,000-$30,000 per year)
• No offset account benefit (or limited offset)
• Break costs if you refinance or sell during fixed period
• Can't take advantage if rates fall

Break Costs:

• Can be tens of thousands of dollars
• Based on remaining term and rate differential
• Payable if you discharge loan early
• Calculated using wholesale rate movements

Revert Rate Risk:

• Fixed rate ends, you revert to variable
• Revert rate is often uncompetitive
• Need to actively manage transition
• Easy to forget and end up on poor rate

The 2026 Interest Rate Environment

Current Market Conditions

Where We Are:

• RBA cash rate has stabilized after previous rises
• Fixed rates currently competitive with variable in some terms
• Market expecting potential rate movements in either direction
• Economic uncertainty creating pricing challenges

Key Factors Affecting Rates:

• Inflation trajectory and RBA response
• Global economic conditions
• Bank funding costs
• Housing market dynamics
• Employment and wage growth

What the Experts Are Saying

Rate Outlook Factors to Consider:

• Central bank guidance and commentary
• Economic indicators (CPI, employment, GDP)
• Global rate movements
• Market pricing of future rate movements
• Geopolitical factors affecting economy

Important Note: No one can predict rates with certainty. Base your decision on your personal circumstances, not rate predictions.

Making the Decision: A Framework

Step 1: Assess Your Risk Tolerance

Consider Fixed If You:

• Worry about budget uncertainty
• Sleep better knowing exact repayments
• Have tight cash flow margins
• Are risk-averse by nature
• Can't afford repayment increases

Consider Variable If You:

• Comfortable with some uncertainty
• Have buffer to handle increases
• Want maximum flexibility
• Believe rates might fall
• Value features like offset

Step 2: Evaluate Your Financial Situation

Income Stability:

• Secure employment: More options available
• Variable income: Consider fixed for certainty
• Self-employed: Variable often provides needed flexibility
• Career change planned: Think carefully about fixing

Cash Flow Buffer:

• Large buffer: Variable may be fine
• Tight margins: Fixed provides protection
• Inconsistent income: Fixed helps planning
• Building savings: Offset with variable beneficial

Offset Account Balance:

• High balance ($50,000+): Variable with offset likely wins
• Growing balance: Variable allows full benefit
• Minimal savings: Offset benefit is small anyway
• Dedicated saver: Project future offset benefit

Step 3: Consider Your Plans

Timeframe Considerations:

• Selling within 2 years: Avoid long fixed (break costs)
• Staying long-term: Fixed provides certainty
• Uncertain plans: Variable offers flexibility
• Renovating soon: Variable for redraw access

Life Changes:

• Baby expected: Budget certainty helpful
• Career change: Flexibility may be valuable
• Relationship changes: Avoid long fixed if uncertain
• Retirement approaching: Consider debt-free timeline

Step 4: Run the Numbers

Scenario Analysis:

Current Rates (Example):

• 2-year fixed: 6.29%
• Variable: 6.59%

Scenario A - Rates Rise 0.5%:

• Fixed: Save $2,500/year per $500k
• Variable: Pay extra $2,500/year per $500k

Scenario B - Rates Fall 0.5%:

• Fixed: Pay extra $2,500/year per $500k
• Variable: Save $2,500/year per $500k

Scenario C - Rates Unchanged:

• Fixed at 6.29%: Save $1,500/year vs variable at 6.59%
• But lose offset benefit worth potentially $3,250/year on $50k

The Split Loan Strategy

Why Split Your Loan?

Splitting gives you the best of both worlds:

• Portion fixed for certainty
• Portion variable for flexibility
• Reduce overall risk
• Maintain some offset benefit

Common Split Strategies

50/50 Split:

• Half fixed, half variable
• Balanced approach
• Moderate certainty, moderate flexibility
• Suits most borrowers

60/40 Fixed-Heavy:

• More certainty focus
• Smaller variable portion for offset
• Good for risk-averse borrowers
• Still maintains some flexibility

40/60 Variable-Heavy:

• Flexibility focus with some protection
• Larger offset benefit maintained
• Suitable for those with strong cash position
• Protects against significant rate rises

Split Loan Considerations

Advantages:

• Risk diversification
• Maintain offset functionality
• Hedge against rate movements
• Flexibility with partial certainty

Disadvantages:

• More complex to manage
• May have two account fees
• Less optimization either way
• Need to track two portions

Fixed Rate Deep Dive

Choosing the Right Fixed Term

1-Year Fixed:

• Minimal commitment
• Lower break cost risk
• Good for uncertain times
• Often similar to variable rate

2-Year Fixed:

• Sweet spot for many
• Reasonable certainty period
• Manageable break costs
• Good visibility on rate path

3-Year Fixed:

• Longer certainty
• Higher break cost risk
• Suitable for stable situations
• Better for strong convictions on rates

4-5 Year Fixed:

• Maximum certainty
• Highest break cost risk
• Historically rare to be optimal
• Very inflexible

Managing Fixed Rate Risks

Break Cost Protection:

• Understand your break cost exposure
• Avoid long fixes if sale/move possible
• Consider shorter terms for flexibility
• Accept higher rate for less risk

End of Fixed Period:

• Set calendar reminder 3 months before
• Research market rates
• Negotiate with current lender
• Prepare to refinance if needed

Fixed Rate with Offset (Partial Offset)

Some lenders offer fixed loans with partial offset:

• Typically 50-100% of fixed portion
• Reduces certainty vs. variable offset
• May carry additional fees
• Can be good compromise

Variable Rate Deep Dive

Maximizing Variable Benefits

Active Rate Management:

1. Check your rate against market every 6 months
2. Call to negotiate annually minimum
3. Use competitor quotes as leverage
4. Be prepared to refinance if needed

Offset Optimization:

• Route all income through offset
• Maintain maximum balance
• Use credit card for expenses (pay in full)
• Only transfer out when needed

Extra Repayment Strategy:

• Fortnightly payments save 4+ years
• Round up to nearest hundred
• Direct windfalls to loan
• Use redraw as forced savings

Protecting Against Variable Risk

Build a Buffer:

• Maintain 3-6 months expenses accessible
• Know your "break point" for rate increases
• Have plan if rates rise significantly
• Consider income protection insurance

Stress Test Your Budget:

• Add 2% to current rate
• Can you afford those repayments?
• If not, consider fixing some portion
• Build buffer to handle increases

Common Mistakes to Avoid

Mistake 1: Fixing Based on Rate Predictions

• No one consistently predicts rates correctly
• Base decision on your circumstances
• Consider what you can control
• Focus on managing your own risks

Mistake 2: Ignoring Break Costs

• Always ask for break cost estimate
• Understand they can be tens of thousands
• Factor into your decision
• Don't fix if likely to break early

Mistake 3: Forgetting About Fixed Rate Expiry

• Set reminders well in advance
• Don't automatically roll to SVR
• Actively manage the transition
• Negotiate or refinance proactively

Mistake 4: Undervaluing Offset

• Calculate true offset benefit
• Compare net cost, not just rate
• Consider your actual offset balance
• Don't pay for offset you won't use

Mistake 5: Over-Fixing

• Fixing your entire loan eliminates flexibility
• Usually better to keep some variable
• Offset benefits can exceed fixed savings
• Maintain ability to make extra repayments

Decision Summary Tool

Choose Primarily Fixed If:

• ☐ Tight budget with little buffer
• ☐ Risk-averse personality
• ☐ Believe rates will rise significantly
• ☐ Stable plans for fixed term
• ☐ Minimal offset balance
• ☐ Value certainty over flexibility

Choose Primarily Variable If:

• ☐ Strong financial buffer
• ☐ Comfortable with uncertainty
• ☐ Large offset account balance
• ☐ Want maximum flexibility
• ☐ Plans may change
• ☐ Believe rates stable or falling

Consider Splitting If:

• ☐ Uncertain about rate direction
• ☐ Want some certainty and flexibility
• ☐ Have moderate offset balance
• ☐ Can manage two loan portions
• ☐ Want to hedge your bets

Getting Professional Guidance

The fixed vs. variable decision depends heavily on your individual circumstances. Factors like your income stability, savings, plans, and risk tolerance all play a role.

At Ding Financial, we help you analyze your specific situation:

• Calculate the true cost of each option for you
• Assess your risk profile and circumstances
• Model different scenarios and outcomes
• Recommend the optimal strategy for your goals

Contact us for a personalized rate strategy consultation and make your fixed vs. variable decision with confidence.