Avoid These 3 Mistakes When Choosing Your Loan Type

The Loan Type Decision That Follows You for Years

The rate type you choose on your first home loan will affect every repayment you make and how much control you have over your debt. A fixed rate gives you payment certainty but locks you in. A variable rate lets you make extra repayments and use an offset account, but your rate can move. A split loan tries to give you both, but it adds complexity.

Most first home buyers treat this as a yes-or-no decision between fixed and variable, but the real question is what you need your loan to do over the next few years. If you're planning to throw every spare dollar at the debt, a variable rate or split structure will let you do that without penalty. If your income is tight and a rate rise would hurt, fixing part or all of your loan buys you breathing room.

In Victoria, where many buyers are stretching their budget to get into the market with help from the First Home Guarantee, the wrong rate type can mean paying thousands more in break costs or missing out on years of offset savings. The decision matters, and it's one you make once.

Fixed Rates: Certainty With a Cost

A fixed interest rate locks your repayment amount for a set term, usually between one and five years. Your repayments won't change during that period, even if the Reserve Bank lifts rates three times.

The downside is what you give up. Most fixed loans don't allow offset accounts, and if they do, the offset usually doesn't work properly or comes with a higher rate. You're also limited in how much extra you can repay each year, typically capped at $10,000 to $30,000 depending on the lender. If you want to refinance, sell, or pay off a large chunk of the loan during the fixed term, you'll likely face break costs.

Consider a buyer in Geelong who fixes at 6.1% for three years in mid-2025, then wants to refinance 18 months later when variable rates drop to 5.5%. The lender will charge break costs based on the difference between the fixed rate they're losing and what they can lend that money out at now. On a $500,000 loan, that break cost could sit anywhere from $8,000 to $15,000, depending on how far rates have moved and how much of the fixed term remains. That wipes out most of the benefit of refinancing.

Fixed rates work when your income is tight, your budget has no room for a rate rise, and you're not planning to make large extra repayments or move in the next few years. If any of those assumptions are wrong, you'll pay for the certainty you didn't need.

Variable Rates: Flexibility You Can Use

A variable interest rate moves with the market, which means your repayments can go up or down. That uncertainty puts some buyers off, but it also unlocks the features that help you pay off your loan faster.

With a variable rate, you can usually make unlimited extra repayments without penalty, and you can link an offset account to the loan. An offset account is a transaction account where the balance reduces the interest you're charged. If you have a $400,000 loan and $20,000 sitting in offset, you only pay interest on $380,000. That saves you interest every day the money sits there, and you can still access it if you need it.

For first home buyers who receive gifted deposits, bonuses, tax returns, or irregular income, an offset account is one of the most useful tools you'll have. It lets you park money against the loan without locking it away, and the tax-free interest saving is often better than what you'd earn in a savings account after tax.

The risk is rate movement. If you're borrowing at 80% or 90% of the property value and rates rise by 1%, your repayments could jump by $250 to $400 a month on a $500,000 loan. Some buyers can absorb that. Others can't. If you're already at the top of your borrowing capacity and your income is fixed, a variable rate can become uncomfortable quickly.

Split Loans: Two Loans, Two Sets of Rules

A split loan divides your borrowing into two portions, one fixed and one variable. You might fix 50% at 6.0% for three years and leave 50% variable at 6.3%, giving you some repayment certainty and some flexibility.

The variable portion lets you use an offset account and make extra repayments. The fixed portion holds your repayments steady on that half of the debt. If rates rise, only the variable half is affected. If rates fall, you benefit on the variable portion and you're not stuck on a high fixed rate across the whole loan.

The catch is that you're managing two loans with two sets of terms. If you want to refinance, you'll need to deal with break costs on the fixed portion and normal discharge on the variable side. Some lenders also charge two sets of fees, though many have moved away from that.

A split works well when you want protection from rate rises but you also want to make extra repayments or use an offset. It's common for buyers to fix 40% to 60% of the loan and leave the rest variable, adjusting the split based on how much repayment buffer they have and how likely they are to make lump sum payments.

Split loans add a layer of decision-making, but they're not complicated once they're set up. You make one repayment that covers both portions, and your offset account works against the variable side.

What Happens When Your Fixed Term Ends

When your fixed rate expires, your loan automatically rolls onto the lender's variable rate unless you choose a new fixed term or refinance. Most lenders will contact you a few months before the fixed term ends to offer a new rate, but that rate is rarely the sharpest one available.

This is the moment when many borrowers get lazy and stay with their existing lender out of convenience, even though a better rate is available elsewhere. If you fixed three years ago at 2.5% and you're about to roll onto a variable rate of 6.5%, your repayments are about to jump significantly. Refinancing at that point to a lower rate with another lender, or negotiating a discount with your current lender, can save you thousands a year.

If you're coming off a fixed rate and you're not sure what your options are, that's exactly when to get advice. Lenders rely on inertia. You don't have to give it to them.

The Offset Question: Why It Matters More Than You Think

An offset account only works if your loan allows it, and most fixed rate loans either don't offer offset or they neuter it with caps and conditions. If you're choosing a fixed rate, check whether offset is available and whether it's full or partial.

A full offset account reduces your interest on a dollar-for-dollar basis. A partial offset might only offset 40% or 60% of the balance, which means you're getting less benefit for the same money sitting there.

For first home buyers using the First Home Guarantee or another low deposit scheme, an offset account is often the difference between paying your loan off in 25 years or 30 years. Even a modest balance of $10,000 to $15,000 in offset can save you five figures in interest over the life of the loan, and because the benefit is a reduction in interest rather than earned income, there's no tax to pay on it.

If you're tossing up between a slightly lower fixed rate with no offset and a variable rate with offset, run the numbers based on how much you're likely to keep in the account. The answer will depend on your savings behaviour and income pattern, but for most buyers who can maintain a buffer, the offset will win.

How Your Deposit Size Affects Rate Type

If you're borrowing with a 5% or 10% deposit under the First Home Guarantee, your rate options may be narrower than someone borrowing at 80% of the property value. Some lenders don't offer their lowest fixed rates to buyers with less than a 10% or 20% deposit, and others won't allow a split structure on high loan-to-value ratio (LVR) lending.

That doesn't mean you're stuck with a bad rate, but it does mean you need to compare carefully. A lender that offers a sharp rate at 80% LVR might be uncompetitive at 95% LVR, while another lender might be the opposite.

Low deposit borrowers also tend to have less cash sitting around after settlement, which makes the offset account less immediately useful. If you're going into your first home with $2,000 in the bank after settlement, the offset isn't doing much in year one. But if you're the type of buyer who will build that buffer over time, having the offset available from day one means you benefit as soon as the money is there.

If you're applying with a low deposit, ask your broker which lenders offer the most flexible terms at your LVR, not just the lowest rate. The structure can matter as much as the price.

When Refinancing Breaks the Fixed Rate Lock

If you need to refinance or sell while you're still in a fixed rate period, the lender will usually charge break costs. These costs are calculated based on the economic loss to the lender, which depends on how far rates have moved since you fixed and how much time is left on your fixed term.

Break costs can range from zero to tens of thousands of dollars. If rates have risen since you fixed, there's often no break cost because the lender can re-lend your money at a higher rate. If rates have fallen, the break cost can be significant.

Some lenders calculate break costs more generously than others, and a few lenders offer partial portability, meaning you can take your fixed rate with you to a new property if you're upsizing or moving. If you think there's any chance you'll need to move or refinance during the fixed term, check the lender's break cost policy and portability options before you lock in.

For first home buyers who might outgrow their property or change jobs in the next few years, a shorter fixed term or a split loan can reduce the risk of being stuck with a large break cost at the wrong time.

Making the Call Without Overthinking It

There's no perfect rate type, and the right answer will depend on your income, your savings pattern, and how long you plan to stay in the property. If you need certainty and you're not going to make extra repayments, a fixed rate will do the job. If you want control and you're planning to attack the debt, a variable rate with offset will give you the tools. If you want a bit of both, a split loan works.

The mistake is choosing based on what rates might do in the next 12 months, because no one knows. The decision should be based on what you need your loan to do for you, not on picking the direction of the Reserve Bank.

Call one of our team or book an appointment at a time that works for you. We'll run through your situation, your deposit size, and your goals, and help you land on a loan structure that fits what you're actually trying to achieve.

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