What’s the difference between
fixed and variable rate home loans

Pregnant couple reviewing their loan rate options at Pepper Money

With uncertainty around interest rates, you might be wondering if now’s the right time to fix your home loan rate.

Understanding the difference between fixed and variable interest rates is an important step in your home buying journey. That is why we’ve prepared this guide, which could help you gain some insights into the differences between each type of loan so you can work out what is right for your situation.

Could a fixed rate home loan be right for me?

Is a fixed rate home loan right for me?
A fixed rate home loan simply means that you ‘fix’ the interest rate at whatever the rate is at the time of your application, for a set period (usually 1, 3 or 5 years). Your interest rate will stay the same over that period, regardless of the rate changes in the market.

Potential advantages
of a fixed rate loan

Many borrowers prefer to fix their interest rate. With a fixed rate, you have certainty with repayments during the fixed rate period you’ve selected.

You’ll find a fixed rate and strict repayment schedule makes it easier to budget.

Plus, you’ll have peace of mind that you won’t face any surprises should interest rates rise during your fixed rate term.


Possible downsides
of a fixed rate loan

You might not have access to extra features like redraw or be able to make extra repayments to help pay your loan faster (or these features may be limited).

While you’ll have the stability of knowing what your repayments will be, it does mean that if rates fall in the future, you’ll continue to pay the higher rate for the fixed rate loan term.

If you choose to refinance your loan to take advantage of a rate drop, you will often have to pay ‘break’ fees or ‘exit’ fees.

Did you know?

Pepper Money offers a fixed rate home loan option with flexible loan terms of up to 10 years. You’ll get certainty of repayments for the fixed interest rate term, plus, we don’t charge break fees or early repayment fees.


If you want to make extra repayments or have the freedom to refinance and switch your loan for a better rate should your personal circumstances change, a variable rate loan might suit you.

Is a variable rate home loan right for me?

Is a variable rate home loan right for me
A variable rate loan is a loan with interest rates that are subject to change throughout the term of your loan, usually following the official cash rate changes set by the Reserve Bank of Australia (RBA) or if your lender needs to make some adjustments.

Potential advantages
of a variable rate loan

With this type of loan, you’ll often get access to more features like redraw and offset accounts.

You’ll also benefit if interest rates drop –your repayments will go down accordingly, saving money on the life of your loan. Variable loans could also give you the flexibility to make extra repayments, which means you could pay off the loan sooner and further reduce your overall interest payments.

Plus, with a variable loan, it’s usually easier to refinance to a more competitive rate while avoiding paying high break fees.


Potential downsides
of a variable rate loan

Yes, you get some great features but there are downsides too. Should interest rates rise, you might find it more challenging to make repayments. This could put you under financial stress and make it harder for you to budget. You can find out more about our variable rate loan options

Under the standards set by the Australian Prudential Regulation Authority (APRA), when a loan is first taken out, lenders are required to apply a ‘stress test’ to check if their customers could manage repayments if interest rates rise.1

It’s important to feel confident that the mortgage you commit to now will still be affordable in the future. You can use our mortgage repayment calculator to find out how a small rate change could affect your monthly or fortnightly repayments and interest payable over the life of the loan.


What about a split loan?

What about a split loan

With a split loan, you get the best of both loan types. In this type of loan, you ‘split’ your loan so part of the loan is fixed and the other part is variable – and you can even choose which portion of your loan is fixed. This approach allows you to make additional repayments, so you could pay less interest over the life of your loan. And with part of your loan on a variable rate, you’ll still have access to extra features like an offset account.

Importantly, you may also be a little less stressed if interest rates rise, as the increase will affect only part of your loan.

If you want the flexibility to make extra repayments and limit the risk of any interest rate changes, a split loan might suit you.


1 Australian Prudential Regulation Authority (APRA), Prudential Practice Guide, Residential Mortgage Lending December 2022.      


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