Fixed or Variable? What to consider when rates rise

When you have a mortgage, choosing between a fixed or variable loan can feel like a big financial decision, especially during a period of rising interest rates. The headlines can create a sense of urgency, but the right decision is less about reacting to the media and more about understanding how each option suits your financial situation.

A fixed rate means your interest rate and repayments stay the same for a set period, usually between one and five years and a variable rate can move up or down, typically in response to changes made by the Reserve Bank of Australia (RBA).

A rising rate environment

When interest rates rise, banks will typically pass this increase on to mortgage holders, so variable repayments will generally increase. Lenders factor in your ability to service the loan if interest rates rise by a couple of points, but it can be helpful to determine whether your budget allows for a significant increase.

Fixed rates, however, often rise before official rate hikes occur because lenders price them based on where they expect rates to go. By the time rate rises are underway, fixed rates may already reflect expectations of further increases. This means locking in does not automatically guarantee a cheaper outcome. In some cases, fixed rates may already be higher than some variable rates because future increases have been factored in.

Certainty versus flexibility

One of the biggest considerations is how comfortable you are with uncertainty. If higher repayments would put pressure on your household budget, fixing your rate can provide stability. Knowing exactly what you will pay each month makes planning easier and can reduce financial stress.

Fixed loans can include limits on additional repayments and may involve additional costs if you refinance or sell your home during the fixed term. It is important to understand these conditions before committing

Variable loans often come with more flexibility. Many allow extra repayments, offset accounts and simpler refinancing options. This flexibility could help you pay down your loan faster and reduce the total interest you pay.

Having it both ways with a split loan

You do not have to choose one option exclusively. Many lenders allow you to split your loan between fixed and variable portions. This can provide a blend of protection and flexibility. Part of your loan is shielded from further rate rises, while the variable portion allows you to make extra repayments or adapt if your plans change.

A split loan will not remove risk entirely, but it can reduce the chance of feeling locked into the wrong decision if rates move in an unexpected direction.

Consider your future plans

Your life plans should also play a role in your decision. Changes in income, parental leave, renovations, career moves or buying or selling property can all influence which option suits you better. Fixed rates may work best when your situation is stable and predictable. If change is likely, having room to adjust can be reassuring.

If you are likely to move within a few years, the potential costs of breaking a fixed loan could outweigh the benefits of locking in.

If you decide to remain on a variable rate during a rising cycle, it can help to prepare in advance. Increasing your repayments voluntarily or building savings in an offset account can create a buffer so that future rate rises are less of a shock. This approach can also shorten the life of your loan if rates stabilise sooner than expected.

The right choice for you

There is no correct answer. Fixed rates may offer peace of mind and protection against further increases, where variable rates could provide flexibility and potentially benefit you if rate rises are less than expected.

The right choice depends on your financial position, your tolerance for risk and your plans. Interest rate cycles come and go. The goal is not to predict the market, but to choose a loan structure that supports your long-term financial wellbeing and helps you stay confident and in control as you work towards paying off your home.

If you would like clarity on what might work best for you, we are here to help. A quick review of your financial situation and loan options can give you confidence in your next move.