Top Tips to Choose Between Fixed, Variable and Split Loans

A split loan divides your borrowing between a fixed and a variable rate, so only part of your loan is exposed to rate changes. The fixed portion can limit extra repayments and may carry break costs, and you only benefit from rate falls on the variable portion. Whether it suits you depends on how much repayment certainty and flexibility you need.

If you are a first home buyer in Bentleigh, you are probably weighing up home loan options before you make an offer. This guide explains how each structure works, what it costs you, and how to choose.

How Do Fixed, Variable and Split Home Loans Differ?

A fixed loan locks your interest rate for a set period, a variable loan moves with the lender's rate, and a split loan divides your borrowing between the two. You choose the proportion, such as 50/50 or 70/30.

The structure affects three things: how predictable your repayments are, how easily you can pay extra, and what happens if you want to leave the loan early. Lenders assess your borrowing capacity using their own serviceability rules, so ask your lender or broker whether the structure you choose changes the assessment.

Fixed Interest Rate: Certainty With Less Flexibility

A fixed interest rate gives you the same repayment for the whole fixed period, which makes budgeting straightforward. The trade-off is that lenders often limit extra repayments, and leaving early can trigger break costs that depend on the lender and on how rates have moved.

When the fixed period ends, the loan generally moves to another rate arrangement unless you choose a new one. Plan for that date early, and read our guide to fixed rate expiry so it does not catch you off guard. Fixed loans also may not include an offset account, so check this with the lender.

Variable Interest Rate: Offset and Redraw Flexibility

A variable interest rate moves when your lender changes it, so your repayments can rise or fall. In return, variable loans commonly offer an offset account and redraw, though the features and fees depend on the lender and product.

An offset account is a transaction account linked to your loan. The balance in it reduces the amount interest is charged on. Redraw lets you access extra repayments you have already made, subject to the lender's conditions. The main risk is that your repayment can increase when rates rise, so your budget needs room for that. Our repayments page explains how repayments are calculated.

Split Loan Example: A Bentleigh Couple Sharing the Risk

A split loan limits your exposure to rate rises while keeping some flexibility. The example below shows how the numbers work.

Consider a couple buying an established home in Bentleigh with a $500,000 loan over 30 years. They like the certainty of fixing but want to use an offset account for their savings. They split the loan into $300,000 variable with an offset account and $200,000 fixed.

At an illustrative rate of 6.75% p.a. on both portions, the total repayment is about $3,243 a month, the same as a single $500,000 loan at that rate. Now suppose the variable rate rose by 0.50 percentage points to 7.25%. This is an illustration, not a forecast. The variable portion would then cost about $101 more each month, while the fixed portion stays put. If the whole loan were variable, the increase would be about $168 a month.

The couple put their spare savings in the offset account on the variable portion, because the fixed portion limits extra repayments. The outcome is a smaller rate shock and a loan they can still reduce faster with their own savings. The trade-off is that only part of the loan benefits from any rate fall, and the fixed portion may carry break costs if they sell or refinance early.

What Should a First Home Buyer Ask Before Choosing a Loan Structure?

Ask how much room your budget has for a rate rise, how much extra you can realistically repay, and whether you may sell or refinance soon. Your answers point to the structure that suits you.

Then look at the other costs. In Victoria, a first home buyer pays no land transfer duty on a dutiable value up to $600,000, with a concession up to $750,000. You generally need to live in the home for at least 12 months within 12 months of settlement. Our stamp duty page covers this in more detail, and the first home buyers page outlines the wider process.

If you plan to buy with a 5% deposit, the Australian Government 5% Deposit Scheme can remove the need to pay lenders mortgage insurance (LMI). It operates only through participating lenders and has a price cap that depends on the suburb and postcode, so confirm the cap before you bid. Ask the lender which loan features, such as fixed, variable or offset, are available with the scheme. If you buy with a small deposit outside the scheme, LMI may apply and can be added to your loan.

Get pre-approval before you start attending auctions. It confirms your likely borrowing limit and lets you test each structure against your budget before you commit to a purchase. If you are searching in the area, our Bentleigh mortgage broker page has local contact details.

A useful final test is to ask whether you would be comfortable if your repayments rose by a few hundred dollars a month. If the answer is no, a larger fixed portion may suit you. Call one of our team or book an appointment at a time that works for you, and we will compare the options against your numbers.

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