How the fixed vs variable home loan calculator works
The calculator models two principal and interest loans of the same amount and term. For the fixed loan, it calculates a monthly repayment at the fixed rate and adds up the interest charged in each month of the fixed period, which may be set from one to five years. For the variable loan, it begins at the current variable rate entered by the user and recalculates the repayment at the start of each year over the remaining term. The interest charged each month is accumulated in the same manner.
The variable rate changes once a year by the amount entered in the scenario field, which may range from a fall of 1.50 percentage points to a rise of 1.50 percentage points per year. The first change takes effect at the start of the second year. The calculator then reports which structure costs less in total interest over the fixed period, the difference in dollars, the monthly repayment under each loan, and the variable rate reached in the final year. Nothing beyond the fixed period is compared.
Choosing the inputs and a realistic interest rate scenario
The loan amount and term should match the loan under consideration. The fixed rate and variable rate should be rates actually available to the borrower for the same loan purpose and repayment type, since advertised rates differ between owner-occupier and investment loans and according to the loan to value ratio. Fees also matter. Moneysmart describes the comparison rate as a single figure that combines the interest rate with most fees, which makes it a useful check when two products carry different annual or establishment charges.
The annual change in the variable rate is an assumption and cannot be known in advance. A sensible approach is to run at least three scenarios: variable rates falling, remaining steady and rising. The result that matters is not which structure wins in a single scenario, but how large the difference is in each and whether the household budget could accommodate the unfavourable cases. Moneysmart suggests that borrowers calculate what their repayments would be if interest rates rose by 2 percentage points, which is a useful stress test of the variable option.
How fixed rate home loans work in Australia
Under a fixed rate home loan, the interest rate and the repayment are set for an agreed period. The Reserve Bank of Australia has observed that most Australian borrowers who fix do so for three years or less, which is much shorter than the fixed terms common in some other countries. At the end of the period, the loan moves to a variable rate unless the borrower negotiates a further fixed term. Moneysmart lists the principal advantage as easier budgeting, and the principal disadvantages as missing out if interest rates fall and the possible cost of switching loans.
Fixed rate loans are generally less flexible. Lenders commonly cap additional repayments during the fixed period, and RBA research published in 2023 reported a median allowance of $10,000 per year of the fixed term for fully fixed loans. A full offset account is often unavailable, and redraw may be restricted until the fixed period ends. Borrowers who expect to receive a lump sum, to make substantial extra repayments, or to sell or refinance within the period may find these restrictions more significant than the difference in interest rates.
How variable rates follow the cash rate and how fixed rates are priced
The RBA describes the cash rate as the market interest rate for overnight loans between financial institutions, and notes that it has a strong influence over deposit and lending rates. Variable home loan rates have generally moved broadly in line with changes in the cash rate, although the RBA also observes that conditions in financial markets, competition between lenders and the risk of different loan types affect interest rates. A lender may therefore change a variable rate at any time, including independently of a cash rate decision.
Fixed rates are priced differently. The RBA reports that new fixed mortgage rates typically reference swap rates of the same term, and swap rates reflect what financial markets expect the cash rate to be over that period. A fixed rate below the current variable rate is therefore not a discount. It ordinarily indicates that markets expect rates to fall, and a fixed rate above the variable rate indicates the reverse. Market expectations are frequently wrong, but a borrower who fixes in the hope of beating the market is taking a position against professional participants.
Illustrative example: fixing a $500,000 home loan for three years
Consider a hypothetical $500,000 loan over 30 years, with an illustrative three-year fixed rate of 6.00% and a current variable rate of 6.20%. The fixed repayment is approximately $2,998 per month and the variable repayment in the first year is approximately $3,062 per month. Interest on the fixed loan over three years totals approximately $88,339. If the variable rate is assumed to remain at 6.20% throughout, variable interest totals approximately $91,345, and the fixed rate costs less by approximately $3,006.
If the variable rate is assumed to fall by 0.25 percentage points per year, it reaches 5.70% in the third year and variable interest totals approximately $87,654. The variable rate then costs less by approximately $686. If the variable rate is assumed to rise by 0.25 percentage points per year, it reaches 6.70% and variable interest totals approximately $95,041, so the fixed rate costs less by approximately $6,702. All three figures are outcomes of assumptions and none is a prediction.
Two observations follow. First, on a loan of this size the differences are modest relative to total interest of approximately $90,000, so the decision often turns on certainty and flexibility more than on the expected saving. Second, the outcomes are not symmetrical in their effect on a household. A borrower with little room in the budget may value protection against the rising scenario more highly than the possible saving in the falling scenario, while a borrower with substantial savings in an offset account may reach the opposite conclusion.
Break costs and other limits on fixed rate loans
Break costs may apply where a fixed rate loan is repaid, refinanced, switched or paid down beyond the permitted cap before the fixed period ends. They compensate the lender for its loss where wholesale interest rates for the remaining term have fallen since the rate was fixed. Each lender applies its own formula, but the amount broadly reflects the loan balance, the fall in the relevant wholesale rate and the time remaining. Where wholesale rates have risen since the loan was fixed, the break cost may be small or nil.
As a simplified illustration only, a hypothetical balance of $400,000 with two years remaining and a fall of 1.00 percentage point in the relevant wholesale rate suggests a cost in the order of $8,000, being $400,000 multiplied by 1% multiplied by two years. Actual calculations involve discounting and lender-specific terms. The calculator does not include break costs, so a borrower who may sell, refinance or repay early should request a written estimate from the lender before fixing, and again before breaking a fixed term.
Split loans, offset accounts and extra repayments
A borrower is not limited to one structure. Moneysmart describes a partially fixed or split loan, in which one portion has a fixed rate and the remainder a variable rate, in proportions chosen by the borrower such as 50/50 or 20/80. The fixed portion provides certainty over part of the repayment. The variable portion retains unlimited additional repayments and, where offered, a linked offset account. The split may be modelled by running the calculator for each portion separately.
The calculator assumes that only the minimum repayment is made on both loans. In practice, a variable loan with an offset account or regular extra repayments may cost considerably less interest than the comparison suggests, because the balance on which interest is charged is lower. Moneysmart notes that an offset account is worth paying for only where a meaningful balance will be maintained. The BorrowWise offset account calculator and extra repayment calculator estimate those savings, which may then be weighed against the certainty of a fixed rate.
Common mistakes when deciding whether to fix a home loan
A common mistake is to approach the decision of whether to fix a home loan as an attempt to predict interest rates. Fixed rates already incorporate market expectations, and few borrowers are better informed than the market. Other frequent errors include comparing a fixed rate with a standard variable rate that the borrower would not actually pay, ignoring differences in fees, fixing the entire loan shortly before a planned sale or renovation, and overlooking the loss of offset benefits on existing savings.
A further mistake is to disregard what happens when the fixed period ends. RBA analysis of fixed rate loans taken out at very low rates found that many of those borrowers faced increases in repayments in the order of 40 to 60 per cent on expiry. The rate that applies on expiry may also be higher than rates offered to new customers. It is prudent to note the expiry date and to review the options several weeks beforehand, when no break cost applies to a change of loan or lender.
Acting on the result and related decisions
The result may be used to frame the decision and not to make it. Where the difference between the two structures is small across all plausible scenarios, the choice may reasonably rest on the value placed on repayment certainty compared with flexibility. Where a rising scenario would place the household budget under strain, fixing all or part of the loan may be worth a modest expected cost. Lenders already assess new loans at a rate 3 percentage points above the actual rate, in line with APRA's serviceability buffer, but that assessment does not replace a personal budget.
Related decisions include the length of the fixed period, the proportion to fix, and whether the existing lender remains competitive. The BorrowWise refinance calculator compares the cost of switching lenders, the mortgage repayment calculator shows repayments at different interest rates, and the guide to fixed and variable loans sets out the features of each structure in more detail. A mortgage broker or lender can confirm the rates, fees and break cost terms that apply to a particular loan.
Fixed vs Variable Rate Calculator: frequently asked questions
Is it better to have a fixed or variable home loan?
Neither is better in all circumstances. A fixed rate provides certainty of repayments and protection if interest rates rise, but restricts extra repayments and offset, and may involve break costs. A variable rate offers flexibility and the benefit of any rate falls, but exposes the borrower to rises. The suitable choice depends on the borrower's budget, savings, plans for the property and tolerance for uncertainty.
Should I fix my home loan now?
No general answer applies, and the direction of interest rates cannot be predicted reliably. Fixed rates are priced from wholesale swap rates, so they already reflect what financial markets expect. A borrower may consider whether the household budget could absorb higher repayments, whether extra repayments or a sale are likely during the fixed period, and whether a split loan would provide sufficient certainty.
What are break costs on a fixed rate home loan?
Break costs are charges a lender may impose where a fixed rate loan is repaid, refinanced or switched before the fixed period ends. They compensate the lender where wholesale interest rates have fallen since the loan was fixed. The amount depends on the balance, the time remaining and the movement in rates, and may reach thousands of dollars. A written estimate may be requested from the lender.
Can I make extra repayments on a fixed rate loan?
Most lenders permit limited additional repayments during a fixed period, commonly up to an annual or total cap. RBA research has reported a median allowance of $10,000 per year of the fixed term. Payments above the cap may give rise to break costs. Borrowers who plan substantial extra repayments may consider a variable loan, or a split loan in which extra repayments go to the variable portion.
What happens when a fixed rate period ends?
The loan ordinarily moves to a variable rate nominated by the lender, which may be higher than the rates offered to new customers, and the repayment is recalculated. Before expiry, the borrower may fix again, negotiate a discount on the variable rate or refinance with another lender. No break cost applies once the fixed period has ended, which makes expiry a convenient time to review the loan.
What is a split home loan?
A split loan divides the borrowing into two or more accounts, ordinarily one at a fixed rate and one at a variable rate. The fixed portion provides certainty of repayments, while the variable portion permits additional repayments and may be linked to an offset account. The borrower selects the proportions, for example 50/50 or 20/80, according to the degree of rate risk considered acceptable.
Why are fixed rates sometimes lower than variable rates?
Fixed rates are priced from wholesale swap rates for the same term, which reflect the expected path of the cash rate. Where markets expect the cash rate to fall, fixed rates may sit below current variable rates. Where markets expect rises, fixed rates sit above them. A lower fixed rate is therefore a reflection of expectations and not a guaranteed saving over the fixed period.
How long should I fix my home loan for?
Fixed periods of one to five years are generally available, and the RBA has observed that most Australian borrowers who fix choose three years or less. A longer period extends certainty but lengthens exposure to break costs and restrictions on extra repayments. The period may be matched to known plans, such as an expected sale, a return to work or the end of other debts.