One of the most important decisions home buyers and property investors face is whether to choose a fixed-rate or variable-rate home loan. Both options have unique advantages and risks, and the best choice depends on financial goals, market conditions, and personal risk tolerance.
A mortgage comparison calculator is a powerful tool that can help borrowers make an informed decision. By running different scenarios, you can see how changes in interest rates impact monthly repayments, total loan costs, and repayment flexibility.
This guide explores the key differences between fixed and variable interest rates, how each affects mortgage repayments, and how a mortgage calculator can help you determine the best loan type for your financial situation.
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage locks in the interest rate for a set period—typically one to five years. This means your repayment amount remains the same regardless of any market interest rate changes during that period. Once the fixed term expires, the loan typically reverts to a variable rate, unless you choose to refix it.
Advantages of a Fixed-Rate Mortgage
- Predictable repayments – Since the interest rate is fixed, repayments remain stable, making it easier to budget for mortgage expenses.
- Protection from interest rate hikes – If market interest rates rise, a fixed loan shields borrowers from increased repayments.
- Peace of mind – Knowing exactly how much you’ll pay each month can reduce financial stress, especially for first-time home buyers.
Disadvantages of a Fixed-Rate Mortgage
- Limited flexibility – Many fixed-rate loans restrict extra repayments or charge penalties for early repayment.
- Break fees – If you refinance, sell the property, or pay off the loan early, you may incur significant break costs.
- No benefit if rates decrease – If interest rates drop during the fixed term, borrowers miss out on potential savings.
What Is a Variable-Rate Mortgage?
A variable-rate mortgage has an interest rate that fluctuates over time, usually in response to movements in the official cash rate set by the Reserve Bank. This means repayments can increase or decrease, depending on market conditions.
Advantages of a Variable-Rate Mortgage
- Potentially lower interest costs – If interest rates decrease, borrowers benefit from lower repayments.
- More flexible repayment options – Variable loans typically allow extra repayments, offset accounts, and redraw facilities, helping borrowers reduce interest costs.
- Easier to refinance or switch loans – Variable loans generally have no break fees, making it simpler to refinance if a better rate becomes available.
Disadvantages of a Variable-Rate Mortgage
- Repayment uncertainty – Since rates can rise, monthly repayments may increase, potentially stretching household budgets.
- Higher interest costs in a rising rate environment – If interest rates climb, borrowers pay more over time.
- Harder to plan long-term finances – Budgeting is more challenging when repayment amounts fluctuate.
Using a Mortgage Calculator to Compare Fixed and Variable Loans
A mortgage calculator helps borrowers visualise the financial impact of choosing a fixed or variable home loan. By inputting key details—loan amount, interest rate, loan term, and repayment frequency—you can compare total repayments, interest costs, and possible savings under different rate scenarios.
Comparing Monthly Repayments: Fixed vs Variable
Example Scenario:
- Loan amount: $600,000
- Loan term: 30 years
- Fixed interest rate: 5.5% p.a.
- Variable interest rate (initial): 5.2% p.a.
Using a mortgage comparison calculator, we can estimate repayments:
- Fixed-rate mortgage repayment: $3,407 per month
- Variable-rate mortgage repayment (initial): $3,298 per month
At first, the variable loan appears cheaper. However, since rates can change, it’s essential to consider what happens if rates increase or decrease over time.
Assessing Interest Rate Rises for Variable Loans
A mortgage calculator allows borrowers to model different interest rate increases to see their potential impact.
What happens if the variable rate rises to 6.5% after two years?
- New monthly repayment: $3,796
- Extra repayment per month: $498
- Extra cost per year: $5,976
Even a small rate increase can significantly affect household budgets, especially if rates continue rising. This scenario highlights the risk of choosing a variable mortgage when rates are expected to increase.
Interest Savings If Rates Drop
On the other hand, if interest rates decrease, variable-rate borrowers save money compared to those locked into a fixed rate.
Scenario Over Five Years:
- Fixed rate: 5.5% throughout
- Variable rate: Starts at 5.2%, drops to 4.8% after two years
A mortgage calculator can show how much less interest is paid over time if rates remain lower. For some borrowers, the potential for savings outweighs the risk of rate increases.
Beyond Interest Rates: Loan Features to Consider
Aside from interest rates, loan flexibility plays a crucial role in choosing between fixed and variable mortgages.
Extra Repayments & Offset Accounts
Most variable loans allow unlimited extra repayments, reducing interest costs. Many fixed loans limit extra payments, restricting early debt reduction.
For example, a borrower with a $500,000 loan and a $50,000 offset account pays interest only on $450,000 with a variable loan. This feature is rarely available on fixed-rate loans, meaning fixed borrowers miss out on potential savings.
Refinancing Costs & Loan Portability
Fixed loans often have break fees if refinanced before the term expires. If rates drop, variable borrowers can refinance easily, while fixed-rate borrowers may pay thousands in break costs.
Fixed vs Variable: Which Loan Is Best for You?
When to Choose a Fixed Loan:
✅ You need certainty in repayments for budgeting
✅ You believe interest rates will rise significantly
✅ You don’t plan to make extra repayments or refinance soon
When to Choose a Variable Loan:
✅ You want flexibility with extra repayments and offset accounts
✅ You believe interest rates may decrease
✅ You might refinance or sell the property within a few years
Split Loans: The Best of Both Worlds
A split loan allows borrowers to divide their mortgage into fixed and variable portions.
Example:
- $300,000 fixed at 5.5%
- $300,000 variable at 5.2%
This strategy balances stability with flexibility, protecting part of the loan from rate rises while allowing for extra repayments on the variable portion. A mortgage calculator can help determine the ideal split percentage based on repayment capacity and financial goals.
Choosing between a fixed or variable home loan is a major financial decision that depends on market conditions, personal circumstances, and risk tolerance. While a fixed-rate mortgage offers stability and protection from rising rates, a variable loan provides flexibility and the potential for long-term savings if rates fall.
A mortgage comparison calculator is an essential tool to model different scenarios, helping borrowers make informed decisions about their home loan strategy. Whether choosing fixed, variable, or a split loan, understanding the financial impact of each option ensures a mortgage aligns with long-term goals.