How to Use Fixed Rate Loans and Extra Repayments

Fixed Rate Loans Give You Certainty, But Extra Repayments Change the Calculation

Fixed rate loans let you lock in your interest rate for a set period, usually between one and five years. During that time, your repayment amount stays the same regardless of what happens to the cash rate. That predictability helps with budgeting, particularly if you are buying your first home and want to know exactly what you will owe each fortnight.

The trade-off is that most fixed rate loans either do not allow extra repayments at all, or they cap the amount you can pay above the minimum at around $10,000 to $20,000 per year depending on the lender. If you try to pay more than the permitted amount, the lender may charge a break cost, which can run into thousands of dollars. That matters if you expect to receive a tax refund, a bonus, or help from family during the fixed period and want to put that money toward the loan.

How Much Can You Actually Pay Extra on a Fixed Loan?

Most lenders allow between $10,000 and $20,000 in additional repayments per year during a fixed period without penalty. A buyer fixing at current variable rates with a $500,000 loan might be able to pay an extra $10,000 annually without triggering a break cost. If that buyer receives a $15,000 tax refund and tries to deposit the full amount, the lender could apply a charge to the $5,000 above the limit.

Some fixed rate products permit no additional repayments at all. The lender sets a required monthly or fortnightly payment, and you cannot pay more without incurring a cost. That structure delivers the lowest fixed rate available but removes any option to accelerate repayment during the fixed term. If flexibility is important to you, confirm the additional repayment cap before you lock in the rate.

The Split Loan Option Keeps Some Flexibility Intact

A split loan divides your total borrowing between a fixed portion and a variable portion. You might fix 60% of your loan and leave 40% on a variable rate, or split it 50-50. The variable portion typically allows unlimited extra repayments without penalty and may include access to an offset account or redraw facility, depending on the lender.

Consider a buyer purchasing in Scarborough at the current median who borrows $550,000. They fix $330,000 at a set rate for three years and leave $220,000 on a variable rate with an offset account. If they receive $25,000 in combined savings over the next year, they can deposit the full amount into the offset account attached to the variable portion. The offset reduces the interest charged on the $220,000 portion while the fixed portion remains unaffected. The buyer keeps rate certainty on the majority of the loan and full repayment flexibility on the rest.

This approach works well if you expect irregular income such as bonuses, commission, or gifts from family during the fixed period. It also makes sense if you are not sure how much extra you will be able to repay but want to keep the option open without losing the security of a fixed rate.

What Happens When the Fixed Period Ends?

When your fixed term expires, your loan typically reverts to the lender's standard variable rate unless you take action. The standard variable rate is often higher than the discounted variable rate offered to new customers, sometimes by 0.30% to 0.60% or more. On a $500,000 loan, that difference can add up to hundreds of dollars per year in additional interest.

Before the fixed period ends, usually around 90 to 120 days out, most lenders will contact you to discuss your options. You can negotiate a new fixed rate, switch to a discounted variable rate, or refinance to another lender if a better rate is available elsewhere. If you do nothing, the loan rolls to the standard variable rate automatically.

If you made regular extra repayments during the variable portion of a split loan, or if property values in your suburb have risen, your loan-to-value ratio may have improved since settlement. That can put you in a position to negotiate a lower rate or access loan features that were not available when you first borrowed. First home buyers who purchased in suburbs like Hillarys or Duncraig a few years ago and have paid down their loan steadily often find themselves with more negotiating room when the fixed term ends.

Offset Accounts and Redraw Are Not the Same

An offset account is a transaction account linked to your home loan. The balance in the offset account is subtracted from your loan balance before interest is calculated each day. If you have a $400,000 loan and $30,000 in your offset account, you only pay interest on $370,000. You can access the money in the offset account at any time without restriction.

A redraw facility lets you withdraw extra repayments you have already made above the minimum required amount. If you paid an extra $10,000 into your loan over the past year, you may be able to redraw that $10,000 if you need it. Some lenders charge a fee for each redraw, and some place conditions on when and how much you can withdraw. Others allow unlimited redraws at no cost.

Offset accounts are almost never available on fixed rate loans. They are a feature of variable rate loans. Redraw facilities are sometimes available on fixed loans, but only up to the lender's annual extra repayment cap. If you exceed that cap, the extra amount is locked in and cannot be redrawn. For first home buyers who want access to their savings while still reducing interest, an offset account on the variable portion of a split loan is usually the more useful option.

How the First Home Owner Grant and Stamp Duty Concession Work in Western Australia

Western Australia offers a $10,000 First Home Owner Grant for buyers purchasing or building a new home. The grant applies to homes valued up to $800,000 south of the 26th parallel, which includes Perth and the surrounding metropolitan area, and up to $1,000,000 for homes north of that line. The grant does not apply to established homes.

The First Home Owner Rate of duty provides a stamp duty concession on both new and established homes. For homes valued up to $600,000, no duty is payable. For homes valued between $600,001 and $800,000, a concessional rate of $16.15 per $100 above $600,000 applies. A buyer purchasing an established home in Karrinyup valued at $700,000 would pay concessional duty of approximately $16,150, compared to the standard duty of around $25,365. That saving of over $9,000 can be put toward furniture, moving costs, or kept in an offset account to reduce interest.

You can use the stamp duty concession whether you choose a fixed rate loan, a variable rate loan, or a split loan structure. The concession is applied at settlement based on the value of the property, not the loan type. The First Home Owner Grant is paid separately and does not depend on your interest rate or loan features.

Should You Fix All, Split, or Stay Variable?

If you have a stable income, no expectation of windfalls, and want complete repayment certainty, fixing the entire loan makes sense. You know exactly what you will pay each fortnight for the fixed period, and you are protected if rates rise. If you are confident you will not have extra money to put toward the loan, the restriction on additional repayments does not matter.

If you expect to receive irregular income or want the flexibility to make larger repayments when you can, a variable rate loan or a split loan is more suitable. Variable loans typically allow unlimited extra repayments and may include an offset account, which gives you full control over your cash flow. A split loan gives you some of the certainty of a fixed rate while keeping part of the loan flexible.

In our experience, first home buyers who are building in suburbs like Mindarie or Burns Beach often prefer a split loan during construction because they can park savings in an offset account on the variable portion while the fixed portion protects them from rate increases during the build period. Once construction is complete and their income stabilises, they reassess the split and may choose to fix a larger portion or move entirely to variable depending on what rates are doing at the time.

Call one of our team or book an appointment at a time that works for you. We will walk through your income, your savings pattern, and the loan structures that give you the right mix of certainty and flexibility for your situation.

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