Smart Ways to Approach Fixed Rates and Extra Repayments

A fixed rate can give you certainty, but it may limit how much extra you can pay off your loan.

If you are saving a small deposit, that trade-off matters. You want repayments you can count on. You also want the option to pay the loan down faster when life allows. This article shows how to weigh up the two before you choose a loan.

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

Often you can, but usually only up to a limit set by your lender. Fixed loans may limit extra repayments, while variable loans often allow them.

The limit sits in your loan contract and differs between lenders. Some lenders set it as a dollar amount each year, and others use a percentage of the loan. Before you apply, ask for the yearly limit in writing. Also ask what happens if you go over it.

A small deposit usually means a larger loan, so your interest rate choice carries more weight. If you expect bonuses, tax refunds or a family gift, check how the loan treats lump sums.

Fixed Rate Break Costs: How the Calculation Works

A break cost is a charge your lender may apply if you repay more than allowed, refinance or sell during the fixed term. A break fee may apply if you switch loans, sell or pay off the loan early.

The amount depends on three things: how much you repay early, how long is left on the fixed term, and how rates have moved since you fixed. Lenders look at how far wholesale rates have shifted since you locked in. If rates have fallen, the cost tends to be higher. If they have risen, it can be small or nil.

You do not need to guess. Ask your lender for a written estimate before you sell, refinance or make a large extra repayment.

Why a Fixed Rate Can Suit a Small Deposit Budget

A fixed rate suits buyers who need repayments to stay the same while they adjust to owning a home. Repayments stay the same during the fixed period, and you are protected from rate rises.

The trade-off is flexibility. If rates fall, you keep paying your locked-in rate. You may also get fewer features, and extra repayments may be capped.

Your deposit shapes your home loan options. With a smaller deposit, a lender may charge Lenders Mortgage Insurance (LMI), depending on the lender and your deposit size. The low deposit loan page covers how that works. Eligible buyers may also use the 5% Deposit Scheme. Under this scheme the government backs the lender for part of the loan, so no LMI is payable. Loan features such as fixed rates or offset accounts depend on the participating lender, so ask the lender before you commit.

A Split Loan Example: Fixed Certainty With Room for Extra Repayments

A split loan puts part of your borrowing on a fixed rate and part on a variable rate, so you get stability and a place to make extra repayments. This gives more certainty on the fixed part and flexibility to make extra repayments on the variable part.

Consider a first home buyer who borrows $600,000 over 30 years. They want steady repayments, but they also expect to put an extra $500 a month towards the loan once they settle in. Their lender caps extra repayments on fixed loans, and they are unsure the cap will cover their plans.

So they split the loan: $400,000 fixed and $200,000 variable. For illustration, both parts use a rate of 6.75% p.a. Real rates for each part will usually differ. At that rate, the repayment is about $2,594 a month on the fixed part and about $1,297 on the variable part. That is about $3,892 a month in total, the same as the whole $600,000 at 6.75%.

The buyer then sends the extra $500 a month to the variable part. They stay clear of the fixed loan cap, so no break cost applies. Their fixed repayments stay locked in, and the variable balance shrinks sooner.

There are costs to this approach. The variable part can rise if rates rise, so the buyer needs to be comfortable with that. A split can also mean two sets of features and rules, so ask the lender how each part works.

Offset Account or Redraw: What Fixed Loans Often Leave Out

An offset account is a transaction account linked to your loan. Its balance reduces the interest you are charged. Redraw lets you withdraw extra repayments you have already made, under your lender's rules.

Both features are often available on variable loans, while some fixed loans have fewer features. Without them, spare cash can sit in a regular savings account, where it earns interest that is usually taxed. Ask your accountant how that applies to you.

With redraw, check how quickly you can access your money. With an offset account, check the account fees. Some lenders charge a package fee for these features, so weigh that against the interest you could save.

Planning Your Extra Repayments Around the Fixed Term

If your fixed loan caps extra repayments, you can hold spare savings until the fixed term ends, then decide what to do with them. A lump sum paid at expiry avoids break costs, though your savings will not reduce interest in the meantime.

The fixed rate expiry calculator helps you see when your term ends and what could change. To test different amounts, use the extra repayment calculator. You can also run your own numbers with the loan repayment calculator.

If you are early in the process, a pre-approval helps you see what you can borrow before you commit to a loan structure. Our first home buyers page explains how we work with buyers at this stage.

Call one of our team or book an appointment at a time that works for you. We will talk through your deposit, your budget and how fixed and variable options fit your plans.

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