Fixed vs Variable Rates in 2026: Why Your Choice Matters More Than Ever

Published: January 17, 2026
Reading Time: 9 minutes
Location Focus: Sydney, NSW

The Rate Decision Looms

With the RBA expected to increase the cash rate in February 2026, borrowers in Sydney face a critical decision: should you lock in a fixed rate now, or remain on a variable rate? This choice will significantly impact your finances over the coming years. Understanding the pros and cons of each option is essential for making an informed decision that aligns with your financial goals and risk tolerance.

What's the Difference?

A fixed rate mortgage locks in your interest rate for a set period, typically 1 to 5 years. Your repayment amount remains the same throughout the fixed period, regardless of what happens to the broader interest rate environment. This provides certainty and protection against rate increases.

A variable rate mortgage fluctuates with the official cash rate and lender-specific factors. When rates rise, your repayments increase. When rates fall, your repayments decrease. Variable rates typically start lower than fixed rates, but they carry the risk of increasing over time.

Fixed Rates in 2026: The Case for Certainty

Fixed rates offer several compelling advantages in the current market environment. First, they provide payment certainty. You know exactly what your mortgage repayment will be for the fixed period, making budgeting straightforward and reducing financial stress.

Second, fixed rates protect you against rate increases. If you lock in a fixed rate now and rates rise to 4.5% or higher, your rate remains unchanged for your fixed term. This protection is particularly valuable if you're already stretched financially or if you have limited capacity to absorb higher repayments.

Third, fixed rates can be psychologically beneficial. Many borrowers sleep better at night knowing their repayments won't increase. This peace of mind has real value, particularly during uncertain economic times.

However, fixed rates come with trade-offs. If rates fall significantly during your fixed period, you'll be locked into a higher rate. Breaking a fixed rate early typically involves paying break costs, which can be substantial. Additionally, fixed rates are typically 0.2-0.5% higher than variable rates, depending on market predictions about future rate movements. This premium reflects the lender's cost of hedging their interest rate risk.

Variable Rates in 2026: The Flexibility Factor

Variable rates offer flexibility and typically start at lower rates than fixed options. If you have financial capacity to absorb rate increases and you believe rates will eventually fall, variable rates can be advantageous.

Variable rates also allow you to make extra repayments without penalty, which can significantly reduce your interest costs over time. Many variable rate loans include offset accounts, which let you use savings to offset your mortgage balance and reduce interest charges.

However, variable rates carry uncertainty. If rates rise significantly, your repayments will increase, potentially straining your budget. In the current environment where rate rises are expected, this risk is particularly relevant.

Market Conditions Favor Fixed Rates Right Now

In January 2026, market conditions create a compelling case for fixed rates. The RBA is expected to raise rates in February, and most economists forecast additional increases throughout 2026. This means variable rates will likely rise in the coming months.

Fixed rates are currently priced based on market expectations of future rate movements. Once the RBA raises rates, fixed rates will likely increase as well. By locking in a fixed rate now, you're taking advantage of current market pricing before rates rise.

Additionally, the spread between fixed and variable rates is relatively narrow in early 2026. Historically, fixed rates have been 0.5% to 1% higher than variable rates. When this spread is narrow, the cost of certainty is lower, making fixed rates more attractive.

The Hybrid Approach: Split Loans

Many Sydney borrowers use a hybrid strategy, splitting their mortgage between fixed and variable portions. For example, you might fix 60% of your loan at a fixed rate and keep 40% on a variable rate. This approach provides some certainty while maintaining flexibility and potentially lower average interest costs.

A mortgage broker can help you determine the optimal split based on your financial situation, risk tolerance, and market outlook. They can also structure your loan to allow easy transitions between fixed and variable as circumstances change.

How a Broker Helps You Make the Right Choice

Choosing between fixed and variable rates is one of the most important mortgage decisions you'll make. A mortgage broker brings expertise and access to multiple lenders' products, helping you navigate this choice effectively.

Brokers understand how different lenders structure fixed and variable rates. They can compare not just the interest rate, but also the features and flexibility of different loan products. Some fixed rate products allow rate switches or early exit options, while others don't. A broker will explain these differences and help you choose a product that matches your needs.

Brokers also help you stress-test your finances. They can calculate your repayments at various rate levels, helping you understand your financial capacity to handle rate increases if you choose a variable rate. This analysis is crucial for making a confident decision.

Taking Action in Sydney

If you're a Sydney borrower considering your rate options, now is the time to act. The window before the February rate decision is narrow, and rates are likely to increase once the RBA makes its announcement.

Start by getting advice from a mortgage broker. They'll review your current mortgage, discuss your financial situation and goals, and recommend whether a fixed rate, variable rate, or hybrid approach makes sense for you. They'll also compare rates across multiple lenders, ensuring you get the best available terms.

If you're currently on a variable rate and considering switching to fixed, a broker can calculate your break costs (if any) and compare them against the potential savings from locking in a fixed rate. In many cases, the savings justify the break costs.

The Bottom Line

In 2026, the choice between fixed and variable rates is more consequential than ever. Fixed rates offer certainty and protection against rate increases, while variable rates offer flexibility and potentially lower initial costs. The right choice depends on your financial situation, risk tolerance, and market outlook.

Rather than making this decision in isolation, work with a mortgage broker who understands the market, has access to multiple lenders, and can help you analyze your specific circumstances. A broker can help you make a confident decision that positions you well for whatever the rate environment brings in 2026 and beyond.

Ready to make the right rate choice for your Sydney mortgage? Call Frontier Finance at 0413 798 731. Our brokers will review your options and help you choose the rate structure that best suits your financial goals.

Disclaimer: This article provides general information only and should not be considered personal financial advice. Fixed and variable rates vary by lender and loan product. Interest rate forecasts are subject to change, and actual rate movements may differ from expectations. Please consult with a qualified mortgage broker or financial advisor to discuss your specific circumstances before making any lending decisions.