The basic difference
With a fixed rate, the lender locks the rate for the term (or a stated period). Your repayment is known in advance. With a variable rate, the lender can change the rate during the loan, usually in response to funding costs and the broader interest rate environment.
| Feature | Fixed | Variable |
|---|---|---|
| Repayment certainty | High | Can change |
| Benefit if rates fall | Usually not shared | Often passed on |
| Extra repayments | May be limited or restricted | Often more flexible |
| Paying out early | Break costs may apply | Usually fewer restrictions |
Always check the specific terms in the credit contract. Our table describes tendencies, not any particular product.
A worked example
Imagine a $35,000 loan over 5 years. Option A is fixed at 8.50% p.a. Option B is variable and starts at 8.00% p.a. Suppose, in this scenario, that B rises by one percentage point to 9.00% after 12 months and then stays there.
| Option | Monthly repayment | Total interest |
|---|---|---|
| A. Fixed 8.50% | $718.08 | $8,084.72 |
| B. Variable 8.00%, first 12 months | $709.67 | |
| B. Variable 9.00%, from month 13 | $723.40 | $8,239.20 |
In this scenario B starts about $8 a month cheaper, but after the rise it costs about $5 a month more than A and about $154 more in interest overall. If the rate had instead fallen, B would have come out ahead. Nobody can know in advance, which is the point: the choice is about how much uncertainty you can comfortably carry.
Questions to ask yourself
- How tight is my budget? Could I absorb a repayment rise?
- Do I expect to make extra repayments or pay the loan out early?
- What are the break costs on the fixed option, in dollars, in writing?
- Does the loan convert to a variable rate at the end of a fixed period?
For background on what drives rate movements, see the Reserve Bank of Australia. We also unpack the cash rate on our blog.
Quick questions
Can a lender change a fixed rate mid-term?
Not during a properly fixed period, according to the contract terms. Check your documents for when the fixed period ends and what happens next.
Will variable rates always follow the RBA cash rate?
Not exactly. Lenders set variable rates themselves, and other funding and business costs also play a part.
Illustrative only. Every figure on this page is a worked example, not an offer or a quote. Use the repayment calculator to test your own numbers, then compare real quotes in writing.
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