Choosing between a fixed and a variable rate is one of the biggest decisions you make on a mortgage, and nobody can tell you for certain which will be cheaper. What you can do is understand exactly what each option promises, what it costs to change your mind, and whether your budget could handle the worst case.
This guide covers how each type works in the US, Australia, the UK and Canada, then gives you a stress test and a checklist to make the call.
How a fixed rate works
With a fixed rate, your interest rate is locked for a set period. Your principal and interest repayment stays the same for that whole period, no matter what happens to rates in the wider economy.
How long “fixed” lasts depends on where you live:
- US: fixed-rate mortgages commonly run for the full 15 or 30 years.
- Australia and New Zealand: fixed periods are usually one to five years, after which the loan rolls onto a variable rate.
- UK: fixed deals typically last two, three or five years, then revert to the lender’s standard variable rate (SVR).
- Canada: you choose a term, often five years, within a longer amortization period, and renegotiate the rate at each renewal.
The trade-off is flexibility. Because the lender has arranged its own funding at that rate, it usually charges you if you leave early, and many fixed loans limit extra repayments.
How a variable rate works
A variable rate can move up or down during the loan. In Australia and the UK, lenders generally adjust variable rates when the central bank changes its cash or base rate, although they can move independently too. UK tracker mortgages follow the Bank of England base rate plus a set margin. In the US, the equivalent is an adjustable-rate mortgage, covered below.
When the rate changes, your lender recalculates your repayment so the loan still finishes on time, or in some cases keeps the repayment the same and changes the term. Variable loans usually come with more freedom: unlimited extra repayments, redraw, offset accounts and cheap exits.
Pros and cons at a glance
| Fixed rate | Variable rate | |
|---|---|---|
| Repayment certainty | High during the fixed period | Low: repayments can rise or fall |
| If rates fall | You keep paying the higher rate | Your repayments drop |
| If rates rise | You are protected until the fix ends | Your repayments rise |
| Extra repayments | Often capped or charged | Usually unlimited and free |
| Offset and redraw | Limited or unavailable with many lenders | Commonly available |
| Leaving early | Can trigger break costs or penalties | Usually low or no cost |
| Best for | Tight budgets that need certainty | Borrowers with a buffer who want flexibility |
Notice that the rate itself is not on the list. Sometimes fixed rates are below variable rates, sometimes above. The starting rate reflects what lenders expect to happen, so a lower fixed rate is not free money, and a higher one is effectively the price of insurance.
Break costs and early repayment charges
The biggest risk with a fixed rate is not that rates fall. It is that your life changes. If you sell, refinance or pay off a large chunk during the fixed period, you may face a charge.
Australia (break costs). Break costs compensate the lender for the interest it loses when you leave a fixed loan early. They are typically larger when wholesale rates have fallen since you fixed, the balance is large, and there is a lot of the fixed term left. If rates have risen, the break cost may be small or zero.
A rough break-cost estimate. You have $500,000 fixed at 6.2% with two years left, and the lender’s comparable funding rate for two years has dropped to 4.7%. A quick estimate is balance × rate difference × years remaining: $500,000 × 1.5% × 2 = $15,000. Allowing for the balance shrinking and for discounting, the figure is closer to $14,000. Each lender uses its own formula, so always ask for a written quote.
UK (early repayment charges). ERCs are usually a percentage of the balance, and they often step down each year of the deal. On a £250,000 balance, a 3% ERC is £7,500. Many lenders still let you overpay a set amount each year, commonly up to 10% of the balance, without a charge.
Canada (prepayment penalties). Breaking a fixed-rate mortgage typically costs the greater of three months’ interest or an interest rate differential (IRD), which can be large when rates have fallen. Breaking a variable-rate mortgage usually costs three months’ interest.
US (prepayment penalties). Most US mortgages can be refinanced or repaid at any time without a penalty, and federal rules restrict penalties where they do exist. Check your Loan Estimate, which states whether the loan has one.
US adjustable-rate mortgages (ARMs)
An ARM starts with a fixed rate for an initial period, then adjusts at set intervals based on an index plus a margin. The name tells you the structure:
- 5/1 ARM: fixed for five years, then adjusts once a year.
- 7/6 or 5/6 ARM: fixed for seven or five years, then adjusts every six months.
ARMs have caps that limit how far the rate can move. A common structure is written as 2/2/5: up to 2 percentage points at the first adjustment, up to 2 points at each later adjustment, and no more than 5 points above the starting rate over the life of the loan.
Worst case on a $400,000 5/1 ARM. The starting rate is 5.5%, so the repayment is $2,271.16 for five years and the balance drops to about $369,842. If rates rise as far as the caps allow:
- Year 6 at 7.5%: $2,733.10 a month
- Year 7 at 9.5%: $3,218.65 a month
- Year 8 onwards at 10.5%: $3,466.97 a month
That is a 53% increase on the original repayment. It might never happen, but you should know you could survive it.
An ARM makes the most sense if you are confident you will sell or refinance before the first adjustment, and can handle the capped worst case if your plans change. The Consumer Financial Protection Bureau has a detailed handbook on ARM features.
Split loans, remortgaging and other local options
Split loans (Australia). You do not have to choose one or the other. A split loan lets you fix part of the balance and keep the rest variable. Take a $500,000 loan over 30 years split 60/40: $300,000 fixed at 6.0% ($1,798.65 a month) and $200,000 variable at 6.3% ($1,237.95). If the variable rate rises 2 points, your total repayment goes up by $271.62 a month. Had the whole loan been variable, the same rise would add $679.06. You keep an offset account and unlimited extra repayments on the variable part.
Remortgaging at the end of a fix (UK). When a fixed deal ends, you move onto the SVR, which is often much higher. Most borrowers avoid this by remortgaging to a new lender or taking a product transfer with their existing one. Lenders often let you secure a new deal several months before your current one ends. Compare arrangement fees against the rate saving, and put the end date in your calendar.
Renewal (Canada). At the end of each term your lender will offer renewal terms. You can shop around at that point without a prepayment penalty. Renewal is the natural moment to switch between fixed and variable.
Rate locks. In Australia and the US, the fixed rate you apply for can change before settlement. A rate lock, sometimes for a fee, holds it in place.
Stress-test your repayments
Before you choose, work out what happens to your budget if rates rise by 2 or 3 percentage points. Regulators in Australia and Canada, among others, require lenders to check something similar when you apply, but you should run the test on your own spending, not just on paper.
Here is a $400,000 loan over 30 years with a 6% starting rate:
| Rate | Monthly repayment | Increase per month | Increase per year |
|---|---|---|---|
| 6% (starting rate) | $2,398.20 | ||
| 7% (+1 point) | $2,661.21 | $263.01 | $3,156 |
| 8% (+2 points) | $2,935.06 | $536.86 | $6,442 |
| 9% (+3 points) | $3,218.49 | $820.29 | $9,843 |
Ask yourself whether you could find an extra $540 to $820 a month without missing other bills or running down your emergency savings. If the answer is yes, a variable rate’s flexibility may be worth more to you than a fixed rate’s certainty. If the answer is no, fixing at least part of the loan is a sensible form of insurance.
Run your own figures in the mortgage calculator by changing the rate field, or use the affordability calculator to see how a buffer changes what you can borrow.
A decision checklist
Work through these questions honestly:
- Could you afford repayments 2 to 3 points higher? If not, lean towards fixing all or part of the loan.
- Might you sell, move or refinance in the next few years? If yes, a long fix or a loan with heavy break costs is risky.
- Do you plan to make big extra repayments? If so, check the overpayment limits on any fixed product. Our guide on paying off your mortgage faster shows how much those payments are worth.
- Will you use an offset account or redraw? These are more often available, and sometimes only available, on variable loans.
- What happens when the fix ends? Find out the revert rate, or for an ARM, the caps, the index and the margin.
- How do the total costs compare? Look at the APR, APRC or comparison rate, and read APR vs interest rate to understand what those numbers leave out.
- Would a split give you most of both? For many households, partial certainty plus partial flexibility is the most comfortable choice.
The bottom line
A fixed rate buys certainty and charges you for it in flexibility. A variable rate gives you freedom and passes the rate risk to you. Neither is a bet you can reliably win, so choose the structure that your budget and your plans can live with in a bad year, not the one that looks cheapest today.
When your fixed period ends, revisit the decision. The refinance calculator can show whether switching lenders is worth the costs, and how mortgage amortization works explains why resetting to a new 30-year term can cost more than it saves.
This guide is general information, not personal financial advice. Rules and products vary by country and lender.