Do you know Fixed, Variable or Split is Right for You?

Deciding Which Rate Structure Matches Your Financial Position

Your rate structure should reflect how much certainty you need versus how much flexibility you want to retain. A fixed rate locks your repayment amount for a set period, typically one to five years, protecting you from rate rises but preventing you from making extra repayments beyond a capped amount. A variable rate moves with the lender's adjustments, allowing unlimited additional repayments and access to an offset account, but your repayment amount changes when rates shift. A split loan divides your borrowing between both structures, giving you partial protection and partial flexibility.

Consider a buyer securing an owner-occupied loan who expects consistent income over the next three years but wants the option to pay down debt faster if they receive an annual bonus. Locking the entire loan removes flexibility. A full variable rate exposes them to repayment increases they may not absorb if rates rise sharply. Splitting the loan 60% fixed and 40% variable protects most of their repayment from movement while preserving room to make lump sum payments against the variable portion without penalty.

Fixed Rates When You Need Repayment Certainty

A fixed rate suits borrowers who prioritise budget certainty over repayment flexibility. You know exactly what you will pay each month, which matters when your income is steady but your margin for unexpected increases is limited. Fixed rates typically restrict extra repayments to around $10,000 to $30,000 per year depending on the lender, and redraw access is often unavailable. You also forfeit access to an offset account during the fixed period, meaning surplus cash sits in a separate savings account earning taxable interest rather than reducing your loan balance.

Break costs apply if you exit a fixed rate early, calculated on the difference between your locked rate and the lender's current funding cost over the remaining fixed term. If rates have fallen since you fixed, the break cost can be substantial. If rates have risen, the break cost may be zero or negligible. This makes fixed rates less suitable if you anticipate selling, refinancing, or paying down the loan quickly. For borrowers planning to hold the property and maintain steady repayments, the certainty often outweighs the limitations.

Variable Rates When Flexibility and Offset Access Matter

A variable rate gives you control over repayment timing and loan structure. You can make unlimited extra repayments, redraw funds if needed, and link an offset account to reduce interest without locking cash into the loan. An offset account is particularly useful for owner-occupied borrowers who accumulate savings or receive irregular income, as every dollar in the account reduces the balance on which interest is calculated.

Variable rates respond to lender pricing decisions, which reflect but do not mirror Reserve Bank movements. A rate cut does not guarantee your lender will pass on the full reduction, and rate rises are often applied within days. This variability makes budgeting harder, but the trade-off is access to loan features that reduce interest over time. If you plan to make regular additional repayments or anticipate receiving lump sums, a variable rate allows you to apply those payments immediately without restriction. You can also refinance your loan at any time without incurring break costs, giving you leverage to switch lenders if better pricing or features become available.

Split Loans for Borrowers Who Want Partial Protection

A split loan divides your borrowing into fixed and variable portions, typically in proportions like 50/50, 60/40, or 70/30. You choose the split based on how much repayment certainty you need and how much flexibility you want to preserve. The fixed portion stabilises part of your repayment, while the variable portion gives you access to offset and unlimited extra repayments.

In a scenario where a borrower takes out a loan and splits it 70% fixed and 30% variable, the fixed portion protects the majority of their repayment from rate rises over the next three years. The variable portion remains open for extra repayments and supports an offset account where they park their salary and savings. If interest rates rise by 1% during that period, only 30% of their loan is affected. If they receive a bonus or tax return, they can apply it to the variable portion without penalty. The structure does not eliminate interest rate risk, but it reduces exposure while maintaining access to features that reduce interest over time.

You can adjust the split ratio when the fixed term expires, either by re-fixing part of the loan, converting it all to variable, or maintaining a similar split under updated rates. The flexibility to restructure at expiry makes split loans useful for borrowers whose income or property plans may shift over the medium term. If you are approaching the end of a fixed period and unsure whether to refix, a fixed rate expiry review allows you to compare current offers and adjust your structure before the fixed portion reverts to variable.

How Rate Discounts Are Applied Across Different Structures

Lenders advertise standard variable rates and fixed rates, but the rate you receive depends on your loan size, deposit, property type, and whether you are purchasing or refinancing. A discount applied to the standard variable rate determines your actual rate, and that discount can be negotiated based on your borrowing profile. Fixed rates are quoted as absolute figures rather than discounts, but lenders may offer lower fixed rates if you borrow above certain thresholds or meet specific criteria.

Variable rate discounts are ongoing, meaning if the lender increases the standard variable rate by 0.25%, your discounted rate also rises by 0.25%. Fixed rates do not change during the fixed period, but the rate you lock in reflects market pricing at the time you commit. If you delay locking your fixed rate after pre-approval, the rate may increase before settlement if wholesale funding costs rise.

Split loans allow you to negotiate separately for the fixed and variable portions, but some lenders apply a higher fixed rate or lower variable discount when you split rather than committing fully to one structure. Understanding how your lender prices split loans ensures you are not disadvantaged by structuring for flexibility.

Offset Accounts and How They Work With Variable and Split Loans

An offset account is a transaction account linked to your home loan where the balance reduces the amount of interest charged. If your loan balance is $400,000 and your offset account holds $20,000, you pay interest on $380,000. The offset does not reduce your minimum repayment amount unless you request a recalculation, but it reduces the interest portion of each repayment, meaning more of your payment goes toward the principal.

Offset accounts are only available on variable rate loans or the variable portion of a split loan. During a fixed period, you forfeit offset access, which means surplus cash must sit in a separate savings account where it earns interest that is subject to income tax. For owner-occupied borrowers, offset is often more valuable than a savings account because the interest saved is effectively tax-free, whereas savings interest is added to your assessable income.

If you split your loan and link an offset to the variable portion, the benefit is proportional to the size of that portion. If your variable portion is $150,000 and your offset holds $20,000, you save interest on $20,000 calculated at the variable rate. If your variable portion is $300,000, the same $20,000 offset delivers the same dollar saving, but the impact relative to the total loan is smaller.

When to Reconsider Your Rate Structure

Your rate structure should be reviewed when your fixed term expires, when your financial position changes, or when you plan to sell or refinance. A fixed rate that suited you at purchase may no longer align with your repayment capacity if your income has increased or you have built savings you want to deploy against the loan. A variable rate that worked while you were accumulating offset funds may leave you exposed if rates rise and your income becomes less certain.

If you are holding an investment loan, the offset benefit is particularly relevant because the interest saved has no tax deduction, while the interest you do pay remains deductible. Parking surplus cash in an offset linked to your investment loan reduces non-deductible interest without affecting the deductibility of the remaining balance. Fixed rates on investment loans can make sense if you are buying in a rising rate environment and want certainty over cash flow, but you lose the ability to make extra repayments or offset, which can reduce the total interest paid over the life of the loan.

Split structures can be adjusted at any point by paying down one portion faster than the other, effectively changing the ratio over time. If you want to reduce your fixed exposure, you can direct all extra repayments to the variable portion, gradually shifting the balance toward variable. This does not require refinancing or restructuring, and it gives you control over how the loan evolves as your circumstances change.

Call one of our team or book an appointment at a time that works for you to discuss which rate structure aligns with your income, repayment capacity, and property plans.

Frequently Asked Questions