Is a fixed rate meant to be cheaper than a variable one?

Greater Bank advertises its cheapest variable home loan at 6.09%. Its two-year fixed rate is 6.44%.

Borrowers keep circling that number. On r/AusPropertyChat on 13 October, u/Jumpy_Penguin_8114, settling on a $1.1 million loan, put the choice plainly: 6.64% variable with CBA, or 6.78% fixed. u/flintzz replied that a search for "should I fix my rate?" turns up a pile of threads already.

Three weeks earlier u/toxicpearl had 6.04% variable pre-approved and asked the same question. u/joeltheaussie's answer was the short version: the fixed rate is "already above current variable", so "you will be paying for rate rises anyway".

We read the whole board this morning: 195 products across 31 lenders. Matching each lender's cheapest variable rate against its cheapest two-year fixed, the fixed rate came out higher at all 31.

The gap runs from 0.10 points at ANZ to 1.05 at Bank of Sydney, with a median of 0.35. These are advertised rates, because a fixed loan's comparison rate blends the fixed term with the revert rate that follows it. On a $600,000 loan over 30 years, Up's 0.25 points is $98 a month and CBA's 0.48 points is $190.

The longer the fix, the more it costs. The median gap is 0.35 points at one and two years, 0.40 at three, and 0.58 at five.

Banks hedge a fixed loan with swaps matched to its term, so the rate tracks the swap market rather than the cash rate. The Reserve Bank's May bulletin says new fixed rates move "following movements in tenor-matched swap rates, which they typically reference". Those swaps carry the market's expectation of the cash rate over the next two or five years. The 0.35 points is roughly what the market thinks two years of rises will cost, charged on day one.

The fixed loan also takes away the tools that make a variable loan cheaper. Of the 134 fixed products on our board, 3 come with an offset account, all of them Bendigo's Flex. Of the 61 variable products, 23 do. Moneysmart notes you "may be charged a break fee if you switch home loans, sell the property or pay off the loan early". Fixed loans also "may limit extra repayments".

ANZ's 6.64% is a 60% LVR rate while its 6.74% fixed goes to 80%, so ANZ's real gap is wider than the table shows. Where the LVR caps match, five of six lenders still price fixed above variable. The exception is ANZ's Standard Variable, 7.49% at 80% LVR against 6.74% fixed.

Fixing at a discount is the exception. The Reserve Bank's review of the Term Funding Facility says variable rates "have tended to be lower than fixed rates over recent decades". The pandemic was the big exception. A year ago 11 of the 13 lenders whose records reach back that far were still pricing a three-year fixed below their own variable.

Two-year fixed rates on our board run from 6.35% to 7.29%, 0.94 points apart. That is more than any single cash rate move this year. If the certainty is worth the money to you, price it at three lenders before you sign. Our two-year fixed board has every rate we track.

We don't receive commissions or affiliate payments from lenders, and this is general information, not personal advice.