Beginner's Guide to Fixed Rate Loans for First Home Buyers

Fixed rates appeal to first home buyers who want certainty, but locking in that rate often means losing features that matter when you're self-employed.

If your income fluctuates or you expect lump sum payments from your business, a fixed rate loan without redraw or offset might cost you more in the long run than the rate premium on a variable loan with those features. The real decision isn't whether to fix, it's whether the rate certainty outweighs the flexibility you're giving up.

What a Fixed Rate Loan Actually Locks In

A fixed rate loan guarantees your interest rate for a set period, usually one to five years. Your repayments stay the same regardless of rate movements during that period. If rates rise, you're protected. If rates fall, you're locked in.

Most lenders restrict what you can do with a fixed loan. Extra repayments are often capped at around $10,000 to $30,000 per year depending on the lender. Offset accounts are rarely available on fixed rate products. Redraw facilities may be limited or unavailable. If you need to break the loan early, you'll pay break costs calculated on the lender's wholesale funding loss.

Why Self-Employed Buyers Face a Different Trade-Off

Self-employed income isn't always steady. You might draw a modest salary through the year and take dividends or distributions at tax time. A fixed loan with limited extra repayment options means that lump sum sits in a savings account earning taxable interest instead of reducing your mortgage.

Consider a buyer running a small consulting business in Glen Waverley who draws $70,000 annually but takes a $40,000 distribution each June. On a variable loan with offset, that $40,000 offsets the mortgage balance immediately and saves interest from day one. On a fixed loan capped at $20,000 in annual extras, half that money can't touch the loan until the fixed period ends. Over a three-year fixed term, that difference adds up.

How the 5% Deposit Scheme Works with Fixed Rates

The Australian Government 5% Deposit Scheme allows eligible first home buyers to purchase with a 5% deposit and no lenders mortgage insurance. It's available through participating lenders, and some of those lenders offer fixed rate options under the scheme.

Not every participating lender offers the same loan features. One lender might allow a fixed rate with limited redraw. Another might offer only variable loans under the scheme. You need to confirm what's available with the specific lender before assuming a fixed rate is an option. In Melbourne, the property price cap under the scheme is currently $950,000 for capital city and regional centre postcodes, and $650,000 for other areas in Victoria.

If you're self-employed and using the scheme, confirm whether the lender's fixed rate product under the scheme allows any extra repayments at all. Some don't.

Fixed Rate Break Costs and When They Apply

Break costs apply when you repay a fixed loan early, whether through sale, refinancing, or lump sum repayment above the annual cap. The cost is based on the difference between your fixed rate and the lender's current wholesale funding rate for the remaining fixed term.

If you fixed at 6% and wholesale rates have since risen to 6.5%, the lender isn't losing money and break costs are minimal or nil. If you fixed at 6% and rates have fallen to 5%, the lender loses income and charges you to cover that loss. Break costs in a falling rate environment can reach tens of thousands of dollars depending on loan size and remaining term.

Self-employed buyers often face unexpected opportunities or pressures. Your business might grow faster than planned and you want to upsize. A commercial property opportunity might require you to release equity from your home. If you're locked into a fixed rate and rates have fallen, those break costs become a real barrier.

The Split Loan Strategy That Balances Certainty and Flexibility

A split loan divides your borrowing between fixed and variable portions. You might fix 50% or 60% of the loan and leave the rest variable. The fixed portion gives you rate protection. The variable portion keeps an offset account available and lets you make unlimited extra repayments.

In our experience, self-employed buyers who split their loans tend to direct irregular income into the variable portion via offset while keeping steady repayments on the fixed side. It's not as clean as fixing everything, but it works when your cash flow isn't predictable.

As an example, a buyer purchasing in Box Hill with an $800,000 loan might fix $500,000 for three years and keep $300,000 variable with full offset. Quarterly business income above drawings goes into the offset account and reduces interest on the variable portion immediately. The fixed portion provides a baseline repayment that doesn't move. If rates spike, the majority of the loan is protected. If they fall, one third of the loan can refinance or repay without break costs.

First Home Buyer Stamp Duty Concessions in Victoria

Victoria offers a full stamp duty exemption on homes valued up to $600,000 for eligible first home buyers, with a sliding concession for properties between $600,001 and $750,000. The exemption applies to both new and established homes where the property will be your principal place of residence. You must move in within 12 months of settlement and live there for at least 12 continuous months.

If you're buying new, you may also qualify for the Victorian first home owner grant of $10,000 on properties valued up to $750,000. The grant doesn't apply to established homes. Both the stamp duty concession and the grant can be used alongside the 5% Deposit Scheme, which means a self-employed buyer in Melbourne can combine a 5% deposit, no lenders mortgage insurance, and substantial stamp duty savings on the same purchase.

How Lenders Assess Self-Employed Borrowers for Fixed Loans

Lenders assess self-employed income the same way regardless of whether you're applying for a fixed or variable loan. Most require two full years of financials, either tax returns or business financials depending on your structure. If you're a sole trader, they'll use your taxable income after deductions. If you operate through a company or trust, they'll assess distributions, director salary, and retained profits depending on the lender's policy.

Fixed rate loans don't change the income assessment, but they do affect how much flexibility you have once the loan settles. If your business is growing and you expect higher retained earnings in the next few years, locking into a fixed rate product that doesn't allow you to pay down that extra income might not align with where your business is heading. For more detail on how lenders assess self-employed income, see our guide to self-employed home loans.

When Fixing Makes Sense and When It Doesn't

Fixing works when you value repayment certainty over flexibility and you don't expect to make large extra repayments during the fixed term. It makes sense if your income is relatively stable, you're confident you won't sell or refinance in the next few years, and you believe rates are more likely to rise than fall.

It doesn't make sense if your business regularly generates lumpy cash flow that you'd normally direct toward the mortgage, if you might need to access equity in the short term, or if you're buying a property you expect to outgrow quickly. Self-employed buyers often face those situations more than wage earners do.

Call one of our team or book an appointment at a time that works for you. We'll walk through your business structure, income pattern, and deposit position to work out whether a fixed rate, variable rate, or split loan fits where you're actually at.

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