Everything You Need to Know About Fixed Rate Loans

Can You Make Extra Repayments on a Fixed Rate Home Loan?

Most fixed rate home loans allow limited extra repayments, usually capped at $10,000 to $30,000 per year depending on the lender. Anything above that cap triggers break costs, which can run into thousands of dollars if rates have moved against you.

Consider a buyer who locks in a three-year fixed rate at 5.8% on a loan of $550,000. Two years in, they receive a $25,000 inheritance and want to put it all toward the mortgage. Their lender allows $20,000 extra per year without penalty. They can apply that full amount without issue. But if they want to pay the entire $25,000, the extra $5,000 will incur a break cost. Whether that break cost is $200 or $2,000 depends on where rates sit at the time. If fixed rates have dropped since they locked in, the lender charges them for the lost interest over the remaining term. If rates have climbed, the break cost is minimal or zero.

This matters because teachers often receive lump sums from maternity leave buyouts, long service leave payouts, or family gifts. If your income pattern includes irregular windfalls, a fully flexible loan structure might suit you more than a low fixed rate that restricts repayments. You can read more about loan structures suited to education professionals at home loans for teachers.

What Is the Difference Between Redraw and an Offset Account?

A redraw facility holds your extra repayments inside the loan. You can usually access that money again, but the lender controls the process and may charge a fee or delay the withdrawal. An offset account is a separate transaction account. Every dollar in the offset reduces the interest charged on your loan, but the money stays liquid and available without asking the lender.

Most fixed rate loans do not offer an offset account. Some lenders allow redraw on fixed loans, but the annual cap still applies. If you fix your rate and make $15,000 in extra repayments within the cap, that money sits in redraw. If you need $10,000 back six months later for urgent repairs, you can usually withdraw it, but you have used up part of your annual allowance. Any new extra repayments for the rest of that year will be measured against what remains under the cap.

Variable rate loans more commonly include offset accounts with no cap on extra repayments. A split loan structure gives you both: part of your borrowing on a fixed rate for certainty, part on a variable rate with an offset for flexibility. In our experience, first home buyers who want rate protection but also expect to save irregular amounts during the year often benefit from a 50/50 or 60/40 split rather than fixing the entire loan amount.

How Does a Split Loan Work for First Home Buyers?

You divide your total borrowing between a fixed portion and a variable portion. The fixed portion locks in your rate and a set repayment amount for a chosen term, usually between one and five years. The variable portion moves with the market and allows unlimited extra repayments and access to an offset account if your lender offers one.

As an example, a high school teacher borrowing $480,000 might fix $290,000 at a rate that will not change for three years, then keep $190,000 on a variable rate with an offset account. Their fortnightly pay goes into the offset. During term, the balance might sit at $8,000. Over the summer break, it might drop to $2,000. The offset reduces the interest charged on the variable portion every day, and there is no cap on extra repayments into that portion. If they want to throw a $15,000 tax refund at the loan, it goes straight onto the variable portion without penalty.

The fixed portion gives them certainty over a large part of their repayment. The variable portion gives them room to move when income is lumpy or expenses are unpredictable. You still make one overall repayment to the lender, but behind the scenes the loan is split into two accounts with different terms. This structure is common among buyers using schemes like the Australian Government 5% Deposit Scheme, which allows both fixed and variable structures depending on the participating lender. You can confirm your eligibility and deposit options at mortgages for teachers.

Do You Pay LMI on a Fixed Rate Loan?

Lenders Mortgage Insurance is charged when your deposit is below 20%, regardless of whether you choose a fixed rate, variable rate, or split structure. The premium is calculated on your loan amount and loan-to-value ratio, not your interest rate type.

If you are borrowing more than 80% of the property value, LMI will apply unless you qualify for a waiver. Some lenders offer LMI waivers to professionals in specific industries, including teachers. Those waivers can save you several thousand dollars on a low deposit purchase. The waiver applies to the loan, and you can still choose to fix part or all of that loan once the waiver is approved. More detail on how these waivers work is available at LMI waivers for teachers.

Alternatively, if you are using the Australian Government 5% Deposit Scheme, no LMI is payable because Housing Australia guarantees the gap between your deposit and 20%. That scheme is available through participating lenders, and you can structure your loan as fixed, variable, or split depending on what the lender offers within the program.

Should You Fix Your Rate as a First Home Buyer?

It depends on how much certainty you need and how much flexibility you are willing to give up. If your income is stable, your savings pattern is predictable, and you want to know exactly what you will pay for the next few years, a fixed rate removes one variable from your budget. If you expect lump sum payments, plan to increase repayments as your income grows, or want access to an offset account, fixing the entire loan will limit you.

Rate protection comes with trade-offs. You cannot refinance to a lower rate without paying break costs. You cannot make large extra repayments without hitting the cap. You lose access to features like offset accounts on the fixed portion. For buyers who value certainty above all else, those trade-offs are worth it. For buyers who want to reduce their loan faster or keep their options open, a variable or split structure makes more sense.

Before you lock in a rate, confirm the extra repayment cap in writing, check whether redraw is available, and ask what the break cost calculation looks like if you need to exit early. Those details vary between lenders, and they matter more than the headline rate when your circumstances change. If you are comparing loan structures and want to understand what fits your income pattern, you can request a comparison through a mortgage broker for teachers who works with multiple lenders and can show you the fine print on each option.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions