Fixed vs variable home loan

How the fixed rate vs variable rate calculator does the sum

Both loans start at the same balance over the same term, and both are run through the standard repayment formula. The fixed loan's repayment is set once and does not move for the fixed period. The variable loan's repayment is recalculated over the remaining term at the month you say the rate moves.

Take an example $600,000 loan over 30 years. The fixed rate on offer is 6% for three years, the variable rate today is 5.90%, and you want to test a one point rise twelve months from now.

On that scenario the variable loan costs $7,835 more in payments and still leaves you owing $2,233 more. Add those together and you get the $10,068 interest difference in the row above. The two ways of measuring it agree, which is a useful check that the comparison is fair.

Change the slider to a fall instead of a rise and the whole table swings the other way. That is the point of it. Nothing here predicts anything, it prices the scenario you typed in.

The break-even variable rate, and the question it replaces

The break-even rate is the single constant variable rate that would cost you exactly what the fixed rate costs over the fixed period. On the example above it comes out at 6%, which is the fixed rate itself.

That is not a coincidence and it is not the calculator being lazy. Two loans on the same balance over the same term at the same rate are the same loan, so the break-even always lands on the fixed rate. What matters is what it lets you ask.

The question is about the average, not the peak

Instead of guessing whether rates will rise, you only have to form a view on one thing: will the average variable rate over the next three years sit above 6% or below it? A rate that spikes for two months and comes back barely registers. One that drifts up half a point and stays there decides the whole comparison.

Do run the small moves as well as the large ones. Starting from 5.90%, a rise of only 0.15 of a point after twelve months, to 6.05%, is enough to wipe out the variable loan's head start over three years. A tenth of a point of discount today buys less protection than it looks like it does.

What fixing actually buys, and what it costs

What you are buying is a repayment that cannot change for the fixed period. Not a cheaper loan, not a hedge you can trade, and not protection after the fixed term ends. One number that stays the same while everything else moves.

That is worth a great deal to some households and almost nothing to others. If a $400 rise in the monthly repayment would break your budget, certainty is the product you are actually shopping for. If you have room and reserves, you are just taking a position on rates.

The price of it shows up when you turn out to be wrong. Here is the same example loan run three ways, measured against the $106,007 of interest the fixed loan costs over the three years.

The downside is small and the upside is large here only because the fixed rate on offer sits close to the variable rate today. Where a fixed rate is well above the variable one, the same arithmetic reverses and fixing becomes expensive insurance. Run your own two rates rather than borrowing the conclusion.

What you give up when you fix

The features usually go with the certainty, and they are the part borrowers regret losing rather than the rate.

• An offset account, which most lenders do not offer against a fixed portion, or offer only in a limited form
• Unlimited extra repayments, which are commonly capped on a fixed loan
• Redraw, which is often restricted or unavailable until the fixed term ends
• The benefit of any rate cut, which passes you by entirely for the length of the fixed period
• The freedom to refinance, sell or restructure without a break cost

Break costs are the serious one. They are calculated from the movement in wholesale rates since the day you fixed, they can run into five figures, and they are charged whether you break to refinance, to sell, or because your circumstances changed. Our refinance calculator page goes through them properly.

None of that argues against fixing. It argues against fixing for longer than you can see. If there is a realistic chance you will sell, separate, relocate or restructure inside the fixed term, the break cost is a live risk and it belongs in the decision.

The revert rate, and the date to put in your diary

When a fixed term ends the loan reverts to a variable rate, and that rate is rarely the sharpest one the lender has. Borrowers who do nothing on that date frequently pay more than new customers at the same institution for the privilege of not noticing.

The size of it is easy to underestimate. On the example loan, the balance at the end of the three-year fixed period is $576,504 with 27 years to run. Reverting at 6.50% takes the repayment to $3,779, and at 7% it becomes $3,965, which is $368 a month above the fixed repayment you had been paying.

1. 1

   Write the expiry date down the day you fix

   Not the settlement date, the date the fixed period ends. It is the single most valuable thing in the loan documents and nobody ever looks at it again.

2. 2

   Start looking about eight weeks out

   That is roughly the lead time a refinance needs from application to settlement, which leaves room to move before the revert rate lands rather than after.

3. 3

   Ask your lender what they will do first

   A retention team can often improve the revert rate over the phone. Come to the call knowing what is available elsewhere, because that is what makes it a short conversation.

4. 4

   Then decide again, from scratch

   Fix, go variable, or split. The right answer three years ago is not evidence about the right answer now, and the calculator above is there to be run a second time.

Fixed or variable home loan: deciding without a forecast

Nobody knows where rates go. Not the lenders, not the economists whose forecasts get quoted at you, and not us. Any adviser who tells you otherwise is selling a position rather than giving advice.

So make the decision on something you do know, which is your own household. How much would the repayment have to rise before it hurt, how much buffer sits behind it, and how likely is it that your circumstances change inside the fixed period.

Everything on this page is an estimate built from the figures you typed, not a quote and not an approval. What a fixed rate is worth also depends on which lenders will approve you and at what tier, and we compare a panel of more than 40 of them before recommending either.