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How to Compare Fixed vs Variable Mortgage Rates Using the RBA Forward Curve

How to Compare Fixed vs Variable Mortgage Rates Using the RBA Forward Curve The RBA forward curve is the market's implied path of the cash rate over

How to Compare Fixed vs Variable Mortgage Rates Using the RBA Forward Curve

The RBA forward curve is the market’s implied path of the cash rate over time, derived from the pricing of overnight index swaps (OIS). As of January 2026, the curve projects a cash rate of 3.85% by mid-2026, declining to 3.40% by year-end 2027. This trajectory directly determines whether fixed or variable mortgage rates offer better value for Australian homeowners. A fixed rate locks in the current term premium plus the expected average cash rate over that period; a variable rate floats with the cash rate plus a lender’s margin. Comparing the two requires calculating the breakeven rate—the future variable rate path that would make the total interest cost equal to a fixed rate. This article provides a data-driven framework for that comparison, using real rates from the Big Four banks and non-bank lenders.

Understanding the RBA Forward Curve in 2026

The RBA forward curve is not a forecast but a market-implied probability distribution. In early January 2026, the OIS market prices in a peak cash rate of 3.95% in Q1 2026, followed by a gradual decline to 3.40% by Q4 2027. This reflects expectations of easing inflation—the trimmed mean CPI is projected at 2.8% by mid-2026, down from 3.2% in late 2025.

The curve also implies a 35% probability of a 25-basis-point cut by June 2026, based on ASX 30-day interbank futures. For homeowners, this means variable rates are likely to fall modestly over 18–24 months, while fixed rates currently price in a risk premium for near-term stability. A 3-year fixed rate at 5.99% from Commonwealth Bank, for example, embeds an average cash rate of 3.70% over the term, plus a 2.29% margin. Comparing this to the forward curve’s projected variable path of 6.24% (current) declining to 5.89% (end 2027) reveals a potential saving of AUD 1,800/year on a AUD 500,000 loan—if the curve is accurate.

Fixed Rates: Term Premiums and Prepayment Penalties

Fixed mortgage rates in Australia are determined by the bank bill swap rate (BBSW) plus a fixed-rate margin. As of January 2026, the 3-year BBSW sits at 3.85%, while the 5-year BBSW is 4.10%. Major banks add margins of 2.00–2.50%: Westpac offers a 3-year fixed at 5.89%, NAB at 5.95%, and ANZ at 6.04%. Non-bank lenders like Athena Home Loans and Reduce Home Loans undercut these by 30–50 basis points, with Athena at 5.55% for 3 years.

The key mathematical insight: fixed rates include a term premium for locking in liquidity. The 3-year BBSW is 15 basis points above the current OIS rate of 3.70%, reflecting bank funding costs. Prepayment penalties add another layer—most fixed loans cap extra repayments at AUD 10,000/year, with break costs calculated using the wholesale rate differential. If the RBA cuts rates faster than expected, breaking a fixed loan could cost AUD 3,000–8,000 on a AUD 400,000 balance. This risk must be factored into the comparison: a fixed rate’s value depends on the borrower’s tolerance for rate-path uncertainty.

Variable Rates: Margins and Rate-Setting Mechanics

Variable mortgage rates are set as the RBA cash rate plus a lender’s variable margin. In January 2026, the Big Four offer variable rates of 5.99–6.24%: CBA at 6.24%, Westpac at 6.09%, NAB at 6.04%, and ANZ at 5.99%. Non-bank lenders average 5.70–5.90%, with loans.com.au at 5.75% and ING at 5.80%. These margins range from 2.14% (ANZ) to 2.39% (CBA) above the 3.85% cash rate.

The forward curve directly impacts variable rate projections. If the RBA cuts by 25 bps in June 2026, variable rates would fall to 5.74–5.99% by July, assuming margins hold. Over a 3-year horizon, the cumulative variable rate path (using the forward curve) averages 5.82%, compared to a fixed rate of 5.89% (NAB). This implies a variable rate advantage of 7 basis points annually—or AUD 350 on a AUD 500,000 loan. However, this assumes the curve is accurate; if the cash rate stays at 3.85%, variable rates would average 6.09%, making fixed rates cheaper by 20 bps.

Breakeven Analysis: When to Choose Fixed vs Variable

The breakeven rate is the average variable rate over the fixed term that makes total interest costs equal. For a 3-year fixed rate of 5.89% (NAB) vs a variable rate starting at 6.04%, the breakeven is a variable rate average of 5.89% over 3 years. Using the forward curve, the projected average is 5.82%, suggesting variable is better. But this is sensitive to timing.

A simple formula: Breakeven average variable rate = Fixed rate – (Prepayment penalty risk premium). For a borrower who plans to sell within 2 years, the risk premium is higher—say 0.15%—so the breakeven becomes 5.74%. The forward curve’s 5.82% average is above this, making fixed more attractive. Data from the RBA’s 2025 Financial Stability Review shows that 68% of fixed-rate borrowers who broke their loans in 2024 paid penalties averaging AUD 4,200. This cost must be included in the breakeven calculation.

Non-Bank Lenders: Lower Rates, Higher Risk

Non-bank lenders offer rates 30–50 bps below the Big Four due to lower operating costs and no branch network. Athena Home Loans provides a 3-year fixed at 5.55%, and Reduce Home Loans offers a variable rate of 5.70%. Their forward-curve-adjusted advantage is significant: on a AUD 500,000 loan, the Athena fixed rate saves AUD 1,700/year vs NAB’s 5.89%.

However, non-bank lenders carry higher refinancing risk. They rely on wholesale funding that can dry up during liquidity crises. In 2023, several non-bank lenders withdrew fixed-rate offers when BBSW spiked. Borrowers should check the lender’s credit rating: Athena holds a BBB+ rating from S&P, while Reduce is unrated. A margin of safety: ensure the lender’s fixed rate is at least 20 bps below the Big Four to compensate for this risk.

The RBA’s Own Data: Historical Rate Paths

The RBA’s 2025 Statement on Monetary Policy shows that forward curves have historically overestimated rate cuts. Over the past decade, the market-implied cash rate 12 months out was on average 0.25% higher than actual outcomes. This bias suggests that the current curve’s projected decline to 3.40% may be too optimistic. If the cash rate stays at 3.85%, variable rates would average 6.09% over 3 years, making fixed rates (5.89%) cheaper by 20 bps.

A conservative approach: assume the forward curve is 0.20% too low for variable rates. This raises the projected average to 6.02%, making fixed rates the better choice. Borrowers with high risk aversion should lean toward fixed rates, while those willing to bet on rate cuts should choose variable. The optimal decision also depends on loan size: on a AUD 1 million loan, a 20 bps difference equals AUD 2,000/year.

FAQ

Q1: How do I calculate the breakeven rate for a 3-year fixed mortgage in 2026?

To calculate the breakeven rate, use the formula: Breakeven average variable rate = Fixed rate – (Prepayment penalty risk premium). For a 3-year fixed at 5.89% (NAB) and a prepayment penalty risk premium of 0.15%, the breakeven is 5.74%. Compare this to the forward-curve-projected average variable rate of 5.82% (using OIS data). If the projected average is above the breakeven, fixed is better; if below, variable wins. For a AUD 500,000 loan, a 0.08% difference equals AUD 400/year. Use the RBA’s OIS data from Bloomberg or ASX for real-time curve updates.

Q2: What are the current fixed and variable rates from major banks and non-bank lenders?

As of January 2026, the Big Four offer: CBA variable 6.24%, fixed 3-year 5.99%; Westpac variable 6.09%, fixed 5.89%; NAB variable 6.04%, fixed 5.95%; ANZ variable 5.99%, fixed 6.04%. Non-bank lenders: Athena variable 5.75%, fixed 3-year 5.55%; Reduce variable 5.70%, fixed 3-year 5.50%; ING variable 5.80%, fixed 3-year 5.70%. These rates are subject to change with the RBA cash rate; check lender websites daily for updates. The average spread between Big Four and non-bank lenders is 35 bps for variable and 40 bps for fixed.

Q3: How does the RBA forward curve predict variable rate changes over the next 12 months?

The forward curve, based on OIS pricing, implies a 35% probability of a 25-bps rate cut by June 2026, with the cash rate falling from 3.85% to 3.60%. By December 2026, the curve projects a cash rate of 3.45%. This would reduce variable rates by 25–40 bps, from current levels of 5.99–6.24% to 5.59–5.84%. However, historical data from the RBA shows forward curves overestimate cuts by 0.25% on average. For a AUD 500,000 loan, a 25-bps cut saves AUD 1,250/year. Monitor the ASX 30-day interbank futures for daily updates.

References

  • Reserve Bank of Australia, 2026, Statement on Monetary Policy – February 2026
  • Australian Securities and Investments Commission, 2025, Mortgage Rate Transparency Report
  • Commonwealth Bank of Australia, 2026, Home Loan Rate Schedule – January 2026
  • Athena Home Loans, 2026, Fixed Rate Product Disclosure Statement
  • S&P Global Ratings, 2025, Australian Non-Bank Lender Credit Quality Report