In short
- A fixed rate fixes the instalment; a floating rate moves with the lender's benchmark.
- Floating rates usually start lower; fixed rates offer certainty for planning.
- The more important question is what happens to your budget if the instalment rises.
What the two actually mean
The choice is about who carries the risk of interest rates changing. With a fixed rate, the lender carries it for the fixed period. With a floating rate, you do — the instalment moves when the lender's benchmark moves.
Floating
A floating rate is tied to a benchmark, and it changes when the lender's rate changes. It usually starts lower than a fixed rate, which means lower instalments at the outset and lower total interest if rates fall or stay flat. The trade-off is that the instalment is not guaranteed, and a sustained rise increases what you pay.
Fixed
A fixed rate keeps the instalment stable for the fixed period, which makes budgeting straightforward and protects against a rise. It usually starts higher. Crucially, many 'fixed' rates are fixed only for a defined period and then reset — so the certainty has an expiry date that belongs in your decision.
A 'fixed' rate that resets after a period is not fixed for the life of the loan. Read the reset clause before you treat it as certainty.
Prepayment differences
Prepayment and foreclosure terms have historically differed between fixed and floating loans, and they differ by lender too. If you think you may prepay or transfer the loan, this is part of the comparison, not an afterthought.
How to choose
The honest test is not which rate is lower today, but what you can absorb. If an instalment rise would strain your budget, certainty has genuine value and may be worth paying for. If you have room to absorb movement, a lower floating rate may cost less over time. Neither answer is universal; it depends on your buffer and your temperament.
Questions this raises
Is a fixed rate always safer?
- It fixes your instalment, which is real protection — but if the rate resets after a period, the safety ends there. Check the reset terms.
Can I switch from floating to fixed later?
- Sometimes, usually for a conversion charge and subject to the lender's terms. Ask before you sign, not after.
Read the full guidance on home loan.