How a fixed rate works
With a fixed rate, you and your lender agree an interest rate for a set term, commonly anywhere from six months to five years. For that term, your rate and your repayments stay the same no matter what happens in the wider market. When the term ends, the loan rolls onto the lender’s floating rate unless you fix again, which is why the weeks before a fixed term expires are one of the most important moments in the life of a loan.
The appeal is certainty. You know exactly what your repayments will be, which makes budgeting straightforward. That’s particularly valuable in the early years of a mortgage, when repayments are a big share of your income. The cost of that certainty is flexibility: most lenders cap how much extra you can repay during a fixed term, and leaving the term early can trigger a break cost.
How a floating rate works
A floating (or variable) rate moves with the lender’s advertised floating rate, which the lender adjusts from time to time. Your repayments can go up or down as that rate changes, so there’s less certainty about what you’ll pay month to month.
In exchange, floating loans are flexible. You can usually make unlimited extra repayments, pay in lump sums, restructure, or repay the whole loan without a break cost. Revolving credit and offset accounts (structures that let your savings reduce the interest you pay) are typically built on floating portions for the same reason.
Certainty versus flexibility
That’s the real trade-off, and it’s worth naming plainly: fixing buys certainty at the price of flexibility, and floating buys flexibility at the price of certainty. Neither is better in the abstract. The question is which one your life actually needs, and in what proportion.
You don’t have to pick just one
Most home loans can be split into portions, each structured differently. A common approach is to fix the bulk of the loan for repayment certainty and keep a smaller floating portion sized to whatever you realistically expect to repay early: bonuses, savings, irregular income.
You can also stagger fixed terms, so portions of the loan come up for renewal at different times. That way you’re never re-fixing the entire loan on a single day at whatever rates happen to prevail, and each renewal is a chance to repay a lump sum or adjust the structure.
Break costs, briefly
When you fix, the lender commits funding to you at that rate for the full term. If you repay early or break the term, perhaps because you sell, refinance, or want to restructure, the lender may charge a break cost, broadly reflecting the difference between the rate you locked in and current rates for the time remaining. Sometimes it’s small or nothing; sometimes it’s significant. Lenders will quote the cost on request before you commit to breaking, and it changes daily, so always ask for a current figure.
The practical lesson: if there’s a real chance you’ll sell, move, or receive a large lump sum during the next few years, be cautious about fixing everything for a long term.
The right answer depends on your plans
- Likely to move or sell soon? Long fixed terms can be a poor fit. Shorter terms or a larger floating portion keep your options open.
- Expecting lump sums? A bonus, business income, an inheritance, or proceeds from a sale are most useful against a floating portion or a term that’s about to roll over.
- Income steady or variable? If your budget is tight or your income is fixed, repayment certainty tends to matter more. If your income is strong or variable and you want to pay the loan down aggressively, flexibility earns its keep.
Notice what’s missing from that list: a prediction about where interest rates are heading. Nobody can reliably make one, and a structure built on a guess is fragile. A structure built around your plans holds up whichever way rates move.
How an adviser helps
Structuring is where advice earns its place. We compare 14+ banks and non-bank lenders, design the split and the terms around your situation, and keep track of when each portion comes up for renewal so decisions get made deliberately rather than by default. It’s usually free to you, because the lender pays us a commission when your loan settles.
If you’re still at the starting line, read our guide to getting pre-approved, or try the repayment calculator. If your fixed term is coming up for renewal, our refinancing page covers what a review involves.