Fixed, Variable, and Split Loans: The Pros and Cons

Understanding Your Home Loan Options

As a first home buyer, one of the most important decisions you'll make during your first home loan application is choosing between fixed, variable, and split loan options. Each type of interest rate structure offers distinct advantages and considerations that can significantly impact your finances throughout your home ownership journey.

For teachers across Australia looking to take their first step onto the property ladder, understanding these differences is essential. Whether you're exploring low deposit options, the First Home Loan Deposit Scheme, or standard lending products, the type of interest rate you select will affect your repayments and financial flexibility.

What is a Fixed Interest Rate?

A fixed interest rate remains unchanged for a set period, typically between one and five years. During this time, your repayments stay the same regardless of movements in the broader market.

Advantages of Fixed Rate Loans:

• Certainty with budgeting: You'll know exactly what your repayments will be throughout the fixed period
• Protection from rate increases: If interest rates rise, your rate stays locked in
• Peace of mind: Particularly valuable for first home buyers establishing their first home buyer budget
• Suitable for those with tight cash flow: Teachers can plan their finances around stable repayments

Considerations for Fixed Rate Loans:

• No benefit from rate decreases: If the variable interest rate drops, you won't see any immediate savings
• Limited flexibility: Most fixed rate loans restrict additional repayments or charge fees for exceeding limits
• Break costs: Exiting a fixed rate loan early can result in substantial penalties
• No offset account: Many fixed rate products don't offer offset account facilities

What is a Variable Interest Rate?

A variable interest rate can change at any time based on decisions made by your lender, often in response to movements in the official cash rate set by the Reserve Bank of Australia.

Advantages of Variable Rate Loans:

• Flexibility with repayments: You can typically make unlimited additional repayments without penalties
• Access to features: Variable rate loans often include an offset account and redraw facilities
• Potential for interest rate discounts: You may benefit when rates decrease
• Easier to refinance: Generally fewer restrictions if you want to switch lenders
• Better for overpaying: Ideal if you receive bonuses or want to pay off your loan faster

Considerations for Variable Rate Loans:

• Uncertainty: Your repayments can increase if interest rates rise
• Harder to budget: Monthly repayments may fluctuate, making long-term financial planning more challenging
• Market volatility: Economic conditions can lead to unexpected rate movements

What is a Split Loan?

A split loan combines both fixed and variable interest rate components, allowing you to divide your borrowing between the two options. For example, you might fix 50% of your loan and keep 50% variable, though you can choose any split that suits your circumstances.

Advantages of Split Loans:

• Balance and flexibility: You gain stability from the fixed portion while maintaining flexibility with the variable portion
• Risk management: You're partially protected from rate increases while still benefiting if rates fall
• Access to features: The variable portion typically includes offset account access and extra repayment options
• Customisable: You can adjust the split percentage to match your risk tolerance and financial goals

Considerations for Split Loans:

• More complex: Managing two loan portions requires more attention
• Multiple accounts: You'll have separate loan accounts to monitor
• Partial limitations: The fixed portion still carries the same restrictions as a fully fixed loan

Which Option Suits First Home Buyers?

When deciding between these home loan options, consider your personal circumstances, risk tolerance, and financial goals.

Choose a fixed rate if you:

• Value certainty and consistent repayments
• Are concerned about potential rate increases
• Have a tight budget with little room for payment increases
• Don't plan to make significant additional repayments

Choose a variable rate if you:

• Want maximum flexibility with repayments
• Plan to use an offset account to reduce interest
• Can manage potential payment increases
• Want to pay off your loan ahead of schedule

Choose a split loan if you:

• Want a balance between certainty and flexibility
• Are unsure about future interest rate movements
• Want to hedge your position
• Value having access to loan features while maintaining some stability

Additional Considerations for Teachers

As an educator applying for a home loan, you may have access to specific benefits that can influence your choice of loan structure. Some lenders offer interest rate discounts for teachers, which can apply to fixed, variable, or split loans. You might also qualify for low deposit options such as a 5% deposit or 10% deposit through schemes like the Regional First Home Buyer Guarantee.

When considering your first home buyer eligibility, factor in potential first home buyer stamp duty concessions and first home owner grants (FHOG) available in your state or territory. These incentives can affect how much you need to borrow and, consequently, which interest rate structure makes the most sense.

If you're utilising low deposit options, you'll likely need to pay Lenders Mortgage Insurance (LMI), though some lenders offer LMI waivers for teachers. Understanding these costs is crucial when creating your first home buyer checklist.

For those who have been saving through the First Home Super Saver Scheme, the amount you can access might influence whether you need to explore a gift deposit option or can meet standard deposit requirements.

Getting Started with Your First Home Loan Application

Before you apply for a home loan, it's worth getting loan pre-approval to understand your borrowing capacity and strengthen your position when making an offer. Pre-approval also helps you narrow down which loan structure suits your situation.

At Teacher Loans, we specialise in helping educators understand their options when buying your first home. We can explain the differences between products, help you compare low deposit loans, and guide you through accessing the 5% Deposit Scheme if you're eligible.

Our team understands the unique circumstances of teachers and can help you explore whether home loans for teachers with specialised features might offer better terms than standard products.

Choosing between fixed, variable, and split loan options doesn't have to be overwhelming. The right choice depends on your individual circumstances, financial position, and future plans. By understanding the pros and cons of each option, you'll be well-equipped to make an informed decision that supports your goals as a first home buyer.

Call one of our team or book an appointment at a time that works for you to discuss which home loan option aligns with your circumstances and teaching career.