What Are Fixed and Variable Mortgage Rates?

When you take out a mortgage, one of the first big decisions you’ll face is whether to choose a fixed rate or a variable rate (sometimes called a floating rate).

A fixed rate means your interest rate, and your repayments, stay exactly the same for a set period—usually between 1 and 5 years. No matter what happens to the market, you know exactly how much you need to pay each week, fortnight or month.

A variable rate changes whenever the lender decides to adjust their rates. This could be because of changes to the Official Cash Rate (OCR), competition between banks, or wider economic conditions. With a variable rate, your repayments could go up or down over time.

Each option has its advantages, depending on your situation and what is happening in the economy.

The Advantages and Disadvantages of Fixed Rates

Advantages of a fixed rate:

• Certainty: You know exactly what your repayments will be for the fixed term. This makes budgeting much easier.

• Protection: If interest rates rise, you’re shielded from those increases until your fixed term ends.

Disadvantages of a fixed rate:

• Less flexibility: If you want to pay off your loan faster, you might be charged a fee for making extra repayments.

• Missed opportunities: If interest rates fall during your fixed term, you won’t benefit from lower repayments.

Choosing a fixed rate is often like buying peace of mind. It’s a popular option for first home buyers or anyone who needs certainty in their budget.

The Advantages and Disadvantages of Variable Rates

Advantages of a variable rate:

• Flexibility: You can usually make extra payments without penalty, helping you pay off your loan faster and save on interest.

• Benefit from falling rates: If the Reserve Bank lowers the OCR, your repayments might drop too.

Disadvantages of a variable rate:

• Risk of higher repayments: If rates rise, your repayments will go up too, sometimes quite quickly.

• Harder to budget: Because your repayment amount isn’t locked in, it can be tricky to plan ahead.

A variable rate might suit people who are comfortable with a bit of uncertainty and want the flexibility to make lump sum repayments without extra fees.

Smart Strategies for Locking in a Low Rate

When mortgage rates are falling, it can be tempting to sit on a variable rate and wait for better deals. When rates are rising, locking in becomes more appealing. Here are a few strategies to help you manage your mortgage smartly:

1. Split Your Mortgage

You don’t have to choose just one type. Many banks allow you to split your mortgage into different parts. For example, you might fix half of your loan for two years and leave the other half on a variable rate.

This strategy gives you the best of both worlds—some certainty on your repayments, and some flexibility to make extra payments without penalties.

2. Watch the Economic Signals

Keep an eye on Reserve Bank announcements about the OCR and listen to commentary about where interest rates are heading. You don’t need to be an economist, but knowing whether rates are likely to go up or down in the next year can help you make smarter choices.

If rates are forecast to rise sharply, fixing sooner rather than later could save you a lot over the fixed term.

3. Fix for a Sensible Term

Sometimes fixing for a very short term (like one year) can mean a slightly lower interest rate, but you also risk rates jumping when you come to refix. A longer term (like three years) gives more security but might have a slightly higher rate.

Think about how long you need certainty for. If you are planning to move house or expect your financial situation to change soon, a shorter fixed term might suit better.

4. Review Your Mortgage Regularly

Your mortgage isn’t a "set and forget" product. Every time your fixed term ends, or if you’re on a variable rate, it’s a good idea to review your mortgage.

Check whether your lender’s current rates are competitive and think about refinancing if you can get a better deal elsewhere. Even a small difference in interest rate can save thousands of dollars over the life of your loan.

Making the Best Choice for Your Situation

There’s no one-size-fits-all answer when it comes to choosing between fixed and variable mortgage rates. It depends on your financial goals, your comfort with risk, and your plans for the future.

If you value certainty and want to lock in a stable repayment, a fixed rate could be your best choice. If you want the freedom to make extra payments and are comfortable with some ups and downs, a variable rate might suit you better—or you might choose a mix of both.

Talking to a mortgage adviser who understands your goals can help you make a choice that fits your life, not just today, but in the years ahead.

Managing your mortgage wisely can make a huge difference over time. Whether it’s locking in a good deal, making extra payments, or reviewing regularly, small smart steps can help you own your home faster and save thousands in interest.