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Fixed vs variable when the RBA is cutting

When the Reserve Bank is cutting rates, locking in a fixed rate feels counterintuitive - and it usually is. But the case against fixing during a cutting cycle is more nuanced than “variable is obviously better”. Here is how we frame the decision for clients.

Fixed rate pricing already prices in cuts

Lenders don’t guess where the RBA is going; they hedge it in the swap market. By the time the RBA makes its third cut, the 2-year and 3-year fixed rates have already repriced to reflect where swap markets expect rates to land 18-24 months from now. In other words, the fixed rate you are offered today already embeds market consensus about future cuts.

This means the old rule of thumb - “fix when the RBA is hiking, float when they’re cutting” - only works if your view of future rates differs from the consensus embedded in the swap curve. If you think rates will fall further than the market expects, variable wins. If you think they’ll fall less than expected, fixed wins.

The break-cost asymmetry

Fixed loans in Australia come with break costs if you repay early. The break cost is calculated as the net present value of the lender’s lost interest - which becomes brutal precisely when rates have moved against you. So if you fix and rates fall further than expected, you are trapped: variable would have been cheaper, and unwinding the fixed loan costs tens of thousands.

In the current cycle, 3-year fixed rates are priced about 20 bps below the leading variable rate. That implies the market expects roughly one more 25 bp cut in the next 18 months. If the RBA delivers more than one cut, variable wins; if it delivers less, fixed wins.

When fixing still makes sense

Three situations argue for fixing even in a cutting cycle:

  1. Budget certainty outweighs rate optimisation. Young family with a tight margin who will panic if repayments rise - certainty is worth giving up the expected 20 bps.
  2. A split is available at no cost. Most lenders allow free splits. Fixing 40-50% of the loan hedges your downside while leaving the offset and flexibility on the variable portion.
  3. You’re about to take a career break. If you know serviceability will tighten in 12 months (maternity leave, sabbatical), locking in a known repayment is a useful hedge.

What we’d do

For a typical client in April 2026, we’d recommend staying variable for the full loan, keeping a fully-offset balance of 3-6 months of repayments, and revisiting if the RBA pauses the cutting cycle.