Rates on hold at 3.60 per cent: how fixed, variable and split home loans differ

If your fixed term is close to expiring, or you are settling the structure on a new loan, the question in front of you is not really which rate looks lowest today. It is which risk you would rather carry for the next few years. The cash rate target sits at 3.60 per cent, after three reductions during 2025 and a hold at the Board's most recent meeting. Fixed, variable and split loans all respond to that differently, and the differences live in the mechanics rather than the advertised number.

What the Reserve Bank has done during 2025

The cash rate target has come down three times this year. The Reserve Bank lowered it to 4.10 per cent in February, to 3.85 per cent in May, and to 3.60 per cent in August, with each change taking effect the day after the decision. It held the rate steady in April, in July, and again at its most recent meeting.

At that meeting on 30 September the Monetary Policy Board left the cash rate unchanged at 3.60 per cent and said that "the decline in underlying inflation has slowed". Both headline and trimmed mean inflation sat inside the 2 to 3 per cent range in the June quarter, but the Board noted that partial and volatile data suggested September quarter inflation may come in higher than it expected in August. It also observed that "the housing market is strengthening, a sign that recent interest rate decreases are having an effect", and that it will "take some time to see the full effects of earlier cash rate reductions". The decision was unanimous.

That is a record of what the Board did, not a signal about what it does next. A loan structure chosen on a rate forecast rests on a guess. What you can know is how each product behaves when rates move in either direction.

What a fixed rate buys, and what it costs

A fixed rate holds your interest rate for a set period, commonly one to five years. ASIC's Moneysmart guidance on choosing a home loan sets out the trade-off directly: budgeting is easier because you know the repayment, and fewer loan features can cost you less. Against that, you do not get the benefit if rates fall, it may cost more to switch later if you are charged a break fee, and you may not be able to make extra payments.

Three mechanics sit underneath that summary, and they are where the money is.

Break costs, and how they are worked out

A break cost is charged when a fixed rate loan ends before its fixed term does. ASIC's Regulatory Guide 220 describes break fees as a charge lenders make to recover the economic cost of a customer terminating a fixed rate loan early, and records that they are not charged on variable rate loans at all.

The calculation is the part borrowers find counter-intuitive. RG 220 states that break fees "are usually calculated by reference to the difference between the fixed interest rate ... and the prevailing interest rate ... at the date of early termination over the remaining term for which the interest rate is fixed". The lender is recovering a rate difference, measured across the time you had left to run.

Direction is everything. ASIC notes that a borrower breaking a fixed loan priced below the prevailing rate pays a lower or nil break fee, while a borrower breaking a fixed loan priced above the prevailing rate pays more. Rates have fallen during 2025. Anyone who fixed when the cash rate was higher and now wants out of that term sits on the expensive side of the comparison. That is arithmetic, not a penalty.

There is a limit, and it is enforceable through a court rather than applied automatically. Under section 78(4) of the National Credit Code, a fee payable on early termination is unconscionable if a court determines it exceeds a reasonable estimate of the lender's loss arising from the termination, including average reasonable administrative costs. That is a test, not a formula you can run. Every lender uses its own method, and the only figure that binds is the written payout quote your lender produces on the day.

A worked example, using assumed figures. Take a Robina household with $500,000 sitting on a fixed rate and two years still to run. Assume the rate underpinning that fixed loan is one percentage point above what the lender can now earn on the same two-year residual term. One percentage point on $500,000 for two years is about $10,000, before the balance amortises and before any adjustment for present value. Halve the rate gap and the same arithmetic gives roughly $5,000. Neither number is a quote. The shape is the point: a break cost scales with the rate gap, the balance and the time remaining.

The features a fixed rate usually removes

Moneysmart notes that offset accounts are generally offered with variable rate home loans. Fixed products commonly limit or exclude offset and redraw, and cap how much extra you may repay each year. That is not a flaw; fewer features is one reason a fixed rate can be priced where it is. But a household that runs a large everyday balance may give up more in offset benefit than it buys in repayment certainty.

The revert rate

Every fixed term ends. When it does, the loan moves to a variable interest rate, or you can negotiate another fixed rate. Which variable rate it reverts to is set by your contract, and it is not automatically the sharpest variable rate your lender is advertising to new borrowers that month.

The revert rate applies by default if you do nothing on the expiry date, so it is worth reading in the contract at the start.

How a variable loan works day to day

A variable rate moves as the lending market moves, so the repayment can rise or fall. In exchange, the features usually come with it.

• Offset. An offset account is a transaction account linked to the loan, and its balance reduces the part of the loan charged interest. Moneysmart's example: a $750,000 loan with $50,000 in the offset means interest is charged on $700,000. Interest on most home loans is calculated daily, so the lender subtracts the offset balance each day before working out interest. The money remains yours and remains accessible.
• Redraw. Redraw resembles an offset and behaves differently. Extra payments go onto the loan itself, and you may be able to withdraw them later, but how and when depends on your loan terms. An offset balance sits in an account you control; a redraw balance has already been applied against the debt.
• Extra repayments. Money paid above the scheduled repayment reduces the principal, so interest is charged on a smaller balance from that day forward. When a rate falls, lenders differ on what happens next: some drop the repayment, some hold it where it was. Holding it sends the difference to principal and shortens the term. Dropping it frees up cash flow now. Which of those suits depends on your household, not on the cash rate.

Split loans size the trade-off rather than removing it

A split, or partially-fixed, loan places part of the balance on a fixed rate and the rest on variable. Moneysmart notes that you choose the proportions, giving 50/50 or 20/80 as examples.

The mechanics are both sets of mechanics running at once. The fixed portion carries its own fixed term, its own revert date and its own break cost exposure, measured against that portion's balance rather than the whole loan. The variable portion carries the offset, the redraw and the capacity to repay ahead.

What a split does not do is escape the trade-off. Fixing $300,000 of a $600,000 loan leaves half the balance insulated from a rise and half exposed, and exactly the same is true in reverse when rates fall. It is a way of choosing how much of each outcome you are prepared to live with. Which proportion suits is a question about your cash flow and your tolerance for a repayment that moves, and that is the sort of question our home loans work puts numbers to.

What a comparison rate does and does not tell you

Moneysmart describes a comparison rate as a single figure of the cost of a loan, taking in the interest rate and most fees. That is what makes two products with different fee structures roughly comparable.

The word carrying the weight is "most". A comparison rate is a standardised figure, built on set assumptions about the loan amount and the term, and it cannot capture costs that depend on how you actually use the credit. It does not know your offset balance, whether you will repay ahead of schedule, or whether you will break a fixed term two years in. Treat it as a screening tool, not as the rate you will pay.

LVR and lenders mortgage insurance

Your loan-to-value ratio is the size of the loan against the value of the property. Moneysmart's example on saving a house deposit is a $450,000 loan on a $600,000 home, which is an LVR of 75 per cent.

Above 80 per cent LVR you may have to pay lenders mortgage insurance. Three points about it are commonly misunderstood. It is a one-off fee. It protects the lender, not you and not your guarantor, if you cannot repay. And you either pay it at settlement or your lender adds it to the loan, in which case you pay interest on it for as long as the loan runs.

LMI is priced off LVR, not off whether you choose fixed, variable or split, and a premium capitalised into a 30-year loan costs more than the premium itself. Our lending pages set out the loan types we work across.

Weighing the three structures

None of the three structures is better than the others. Fixed buys certainty and charges you for flexibility. Variable buys flexibility and charges you for uncertainty. A split buys some of each and gives you both sets of rules to manage. The honest way to choose is to price the features you will actually use against the risk that would hurt your household most, then read the contract terms governing break costs and the revert rate. If other debts sit alongside the mortgage, they move the total cost as much as the mortgage rate does, and we cover those under personal loans and debt consolidation.