The Fixed vs Variable Debate

The never-ending question.  Honestly, this question divides more people than a discussion on cats vs dogs, NRL vs AFL, Monte Carlos vs Kingstons and Summer Bay vs Ramsay Street combined. Is one better than the other? Don’t forget we are talking about debt here, so in my opinion they are both shit – much like Summer Bay and Ramsay Street.

But if you have a home loan and haven’t been able to convince the bank to reduce your interest rate to 0%, then it’s a topic that you are unlikely to be able to avoid. What you can avoid is costly mistakes that are made when decisions are emotional and are rushed into (just ask a random selection of American voters what that feels like).

So why fix? At the moment, the difference between the fixed rates and the variable rates are minimal. So why would you go for one over the other?

The Punter

The prospect of rising interest rates inevitably scares a few people into heading into the TAB, placing $100 on the nose on the longest odds horse, putting that whole betting slip on red and hoping you get dealt a blackjack and also roll a 7 while screaming “COME IN SPINNEEEEEER”!!!  (As you can probably tell, I’m not a gambler).

And this is precisely the reason why many Australians fix the rate on their home loan.  They think that they are going to get lucky by fixing their rate and then laughing at all the plebs as they pay through the nose when variable rates inevitably skyrocket.  Great option, but only if you’ve got fresh batteries in the crystal ball.

In reality, and contrary to current economic opinion, rates could indeed fall even lower.  We don’t know what effects on the wider economy will come from Brexit, Trump, or the massive oversupply of CBD units in Australia.  If China sneezes, we could catch one hell of a cold that may force the RBA to drop interest rates to even lower historic depths.  In that scenario, the gambler may well be the pleb, stuck on a high interest rate loan while those on variable rates enjoy much lower repayments.

Another thing to consider is that when you take out a fixed rate loan, the bank not only fixes your interest rate for an agreed term, they also fix your loan balance.  In most cases, banks do not allow you to make extra repayments off your fixed rate loan, nor will they allow you to have an offset account attached to one.   So if your plan is to lock in a low fixed rate AND smash your debt, think again.

The Stresser

You might not be too concerned now as rates are so low, but if they went back up in a hurry, would you worry about your ability to make the repayments?  Have you ever had a sleepless night worrying what would happen if you started finding it difficult to meet your repayments?  If so, then looking at fixing all or some of your debt is a wise move.

Locking in a fixed rate allows you to know that regardless of what happens to the economy and interest rates, you will comfortably be able to make your repayments and this gives you peace of mind.  This is a much better reason to fix.

Having Your Cake and Eating it Too

I’ve never understood this idiom.  Why the hell would you bake a cake and then not eat it?  But you know what it means.

If you are considering fixing your interest rate, think about getting the best of both worlds by splitting your loan and having some fixed and some variable.  This gives you the stability of knowing that the repayments on the fixed rate portion will not change, and also the flexibility of having an offset account and being able to pay off the variable portion during the fixed rate loan.

So how much do you fix?  Some will say 50:50 and I think that’s a pretty lazy approach.  If you are genuinely attracted by the fixed rate but also want the flexibility of a portion remaining variable, then it would make sense to fix most of the loan.

My rule of thumb is to keep enough variable that you are unlikely to be able to repay during the fixed rate period.  Let’s say you go for a 3-year fixed rate loan and keep $20,000 variable.  By living within your means, you pay off that $20,000 in 18 months.  What then?  Well, you’ve paid off the variable portion now and there are penalties for paying off the fixed rate loan, so you just have to sit tight and twiddle your thumbs for the remaining 18 months until the fixed rate term expires before being able to make any additional repayments.

So to avoid that possibility, work out how much would be the maximum amount you can pay off the loan in a year and then multiply that by however many years you are looking to fix for.  Add another $10,000 just in case and this is the amount you should keep variable.

Things To Consider

How long is a piece of string?  There are stacks of things to consider, but here are the main ones.

Break Costs

You want to make sure that you are not going to sell your property or refinance your loan during the fixed rate period as this could incur a significant break cost.  The biggest one I have seen with one of my clients was $24,000 to get out of the fixed rate loan.  This client fixed at the peak – 8.75% and then watched as rates plummeted to 5%.  That $24,000 was a massive pill to swallow, but by breaking the fixed rate she was able to save over $30,000.  Still, if she had stayed variable in the first place, she would have saved $54,000.

Rate Lock Fee

Now this is a gamble.  If you choose to lock in a fixed rate, the bank may want to send you some paperwork which you’ll need to sign and return.  If during that time they decide to jack up the rate for the loan that you’ve chosen, you end up getting the rate that is available on the day of settlement – not the one you were originally attracted to.

To avoid this and to guarantee that you get the rate you were after, you can choose to pay a rate lock fee. This can range from a flat fee of $500 through to a percentage of the loan.

There’s no third option here. You either pay the fee and get the rate you want, or don’t pay it and hope that the bank doesn’t increase the rate before you settle.


If your goal is to save money, consider shopping around for a better variable rate as well as fixed rates before you lock in with your current lender.  There are some seriously cheap variable rates around at the moment. If you haven’t reviewed your loan in the last 2 years, then I can guarantee that your bank is charging you a higher interest rate than what they are giving new customers.  Always compare before you lock in.

What Next?

Needless to say, we are getting hammered with inquiries about fixed rates and refinance options at the moment. If you are happy with your current lender and do not want to consider refinancing, then the quickest option to lock in a fixed rate would be to contact your lender directly and ask them what the process is.

Having said that, we are always here to give you advice. If you are not sure of anything, just call 5448-3880  or send me an email.

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