Fixed vs. variable interest rates: Which is best for you?
For the first time in over two years, the Reserve Bank of Australia (RBA) has pivoted from easing or maintaining interest rates, to lifting the official cash rate by 0.25 percentage points in February to 3.85%.
With major lenders quickly passing this hike on to mortgage holders, many borrowers are feeling the sting of rate rises once again. This shift has reignited the age-old debate: is it time to lock in a fixed rate, or should you stay the course with a variable mortgage?
At Fabe Financial, we believe the best strategy isn’t about outsmarting the market – it’s about aligning your loan structure with your personal need for certainty.
Why fixed rates are moving
Lenders actions are often an early sign of movement when it comes to interest rate projections. Even before the RBA’s February announcement, several major banks began nudging their fixed-rate products upward, suggesting they were expecting rate rises.
When banks increase their fixed rates, it is generally a sign that their internal economists expect variable rates to rise in the near future. They are essentially pricing in the risk of future hikes to protect their own margins. These interest rate predictions are driven by economic data and forecasts in areas that include inflation and unemployment rates.
For borrowers, this means the window to lock in a rate comparable to current variable offers may be closing. However, before jumping into a fixed contract, it is vital to understand the trade-offs involved in fixing.
Understanding the fixed trade-offs
A fixed-rate loan offers the ultimate peace of mind: your repayments remain identical regardless of what happens in the global economy or at the RBA headquarters. But that certainty comes with specific limitations that can impact your long-term wealth strategy.
1. The offset restriction
One of the most significant drawbacks of a fixed-rate loan is the inability to use a 100% offset account. In a variable loan, every dollar sitting in your offset account reduces the interest you pay on your mortgage. Most fixed-rate products do not offer this feature, meaning your idle cash isn’t working as hard for you as it could be.
2. Limits on overpayment
Fixed loans are designed for predictability, and banks generally limit how much extra you can pay into your loan. If you receive a bonus or a windfall and want to slash your principal, a fixed loan may charge you break costs or simply cap your additional repayments (often to $10,000 or $20,000 a year).
3. The risk of falling rates
While the current trend is upward, the economy is cyclical. Let’s say you lock in a rate at 5.69%. If the RBA decides to cut rates later in the year to stimulate growth, you are stuck at that higher rate for the remainder of your term and maybe paying a higher repayment than a variable interest rate. Exiting a fixed-rate contract early when market rates have fallen can result in substantial break fees, which are calculated based on the bank’s loss of anticipated interest.
The split loan strategy – best of both worlds
One strategy that will prevent you from having to choose between going all-in on fixed or variable is to split your loan. By fixing a portion of your debt (e.g., 50%) and leaving the remainder variable, you can achieve a balance of goals:
Protection: The fixed portion protects you against further RBA rate rises.
Flexibility: The variable portion allows you to use an offset account and make unlimited extra repayments.
Hedging: You effectively average out your interest rate risk over the long term.
A historical perspective
When deciding whether to fix, it helps to look at where we sit in the historical arc of Australian lending. During the pandemic, we saw emergency rates as low as 1.5% to 2%. In that environment, fixing was a more obvious choice.
Today, at a cash rate of 3.85%, the decision is more nuanced. While rates are higher than their record lows, they remain relatively moderate compared to the double-digit averages seen in previous decades. The question for 2026 isn’t “is this the lowest rate ever?” but rather “can my household budget handle it if rates go to 4.5% or 5%?”
If the answer is no, then the insurance premium of a fixed rate – even if it is slightly higher than the current variable rate – may be worth considering for your peace of mind.
Don’t wait until it’s too late
The biggest mistake borrowers make is waiting until after a second or third rate hike to seek advice. By then, the banks have usually priced those hikes into their fixed products, making it much more expensive to lock in.
Lenders are currently scrutinising finances more closely than ever. Whether you want to fix your rate to stabilise your cash flow or stay variable to maximise your offset benefits, your strategy needs to be proactive and one that is suitable for you.
How Fabe Financial can help
Rate review: We can check if your current lender is offering a competitive retention rate compared to the rest of the market.
Serviceability check: We’ll calculate how a 0.25% or 0.50% rise would impact your specific borrowing capacity.
Tailored structuring: We can help you determine the exact split percentage that suits your savings habits, offset needs and future financial goals.
Are you concerned about the RBA’s next move? Don’t leave your mortgage to chance. Reach out to us at Fabe Financial today for a tailored review of your loan structure and ensure your finances are prepared for whatever 2026 brings.