Choosing the right finance
This guide explains the key loan types, how each works, their advantages and disadvantages, and which features to prioritise. For the full picture of your home buying journey, start with that guide and come back here for the loan selection detail.
Quick summary: The three main loan types are variable rate (flexibility, rates move with the market), fixed rate (certainty, locked rate for 1 to 5 years), and split (a combination of both). Key features to consider include offset accounts, redraw facilities, extra repayment allowances, and loan portability. Understanding your budget and LVR helps you choose the right structure, and our mortgage repayment calculator lets you model different scenarios.
Key factors in home loan selection
When evaluating home loans, several critical factors deserve your attention. The interest rate type (variable, fixed, or split) determines how much you pay to borrow and whether your repayments change over time. The loan term (typically 25 to 30 years, though shorter terms are available) directly affects your monthly repayments and total interest paid. Features such as offset accounts, redraw facilities, and repayment flexibility enhance your loan's functionality and can save you significant money. And fees and charges, including application fees, ongoing fees, discharge fees, and break costs for fixed-rate loans, all affect the true cost. Always compare the comparison rate, which combines the interest rate with most fees into a single percentage.
Your deposit size and Loan to Value Ratio also influence which loan products and rates are available to you. If your LVR is above 80%, you may need Lenders Mortgage Insurance, unless you qualify for the Home Guarantee Scheme or Help to Buy Scheme.
Variable rate loans
Variable rate loans are a popular choice for their flexibility. The interest rate changes in response to market conditions and lender decisions. When rates fall, your repayments decrease and you save money. When rates rise, your repayments increase.
The key advantages are flexibility to make unlimited extra repayments without penalty (helping you pay off the loan faster), access to features like offset accounts and redraw facilities that further reduce interest costs, and easier refinancing to another lender without break costs. The disadvantages are that repayments can be unpredictable when rates fluctuate, and significant rate increases can strain your budget, especially if you are borrowing close to your maximum capacity.
Variable rate loans are ideal for borrowers who are comfortable with some uncertainty in exchange for flexibility, who have a financial buffer to absorb potential rate increases, and who want to make additional repayments to reduce their loan term. They also suit first home buyers using the Home Guarantee Scheme who want flexible loan features alongside the government guarantee. Read the benefits and risks to understand how scheme requirements interact with loan features.
Fixed rate loans
With a fixed rate loan, your interest rate is locked in for a predetermined period, typically 1 to 5 years. Your repayments stay the same regardless of what happens to market interest rates during that period. After the fixed term ends, the loan usually reverts to a variable rate unless you negotiate another fixed period.
The advantages are repayment certainty (you know exactly what to pay each month), protection against rate increases, reduced financial stress through predictable budgeting, and potentially more favourable serviceability assessments from lenders for borrowers near their borrowing capacity. The disadvantages are that you miss out on savings if rates fall during your fixed term, many fixed loans restrict extra repayments or charge fees if you exceed a limit, they typically offer fewer features than variable loans (such as full offset accounts), and if you need to refinance or pay off the loan early during the fixed term, substantial break costs may apply.
Fixed rate loans suit borrowers who value stability and predictability, who are borrowing close to their maximum capacity and need certainty in payments, and who expect interest rates to rise in the near future. Understanding pre-approval helps you anticipate break costs and plan your loan strategy.
Split loans: combining fixed and variable
A split loan divides your total borrowing into two portions, each with its own interest rate type. One portion is fixed (providing stability) and the other is variable (providing flexibility). You can adjust the split ratio to suit your needs, whether 50/50, 70/30, or any combination that works for your situation.
The advantages are a balanced approach to risk (protection against rate increases on the fixed portion while benefiting from decreases on the variable portion), a customisable risk profile based on your financial goals and rate outlook, and partial access to features like offset accounts and unlimited extra repayments on the variable portion. The disadvantages are increased complexity in managing two loan portions, partial exposure to rate changes on the variable side, potential break costs on the fixed portion if you refinance early, and some lenders setting up split loans as separate accounts, which can complicate administration.
Split loans are ideal for borrowers who want protection from rising rates while maintaining some flexibility, who are unsure about rate direction, and who want to make extra repayments on part of their loan without restriction. Use our property deposit calculator to understand how different deposit amounts affect your split loan structure.
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Repayment options
Principal and interest repayments
Principal and interest (P&I) is the standard repayment method where you pay both the borrowed amount and interest charges over the loan term. This ensures you build equity in your property from day one and fully own your home once the loan is repaid. P&I provides certainty about when your loan will be completely paid off.
Interest-only repayments
Interest-only repayments allow you to pay only the interest charges for a set period, typically 1 to 5 years. During this time, your loan balance remains unchanged and you are not building equity. After the interest-only period ends, your loan reverts to P&I repayments, which will be significantly higher because you are repaying the same principal over a shorter remaining term.
Interest-only loans suit borrowers with investment properties (where the interest may be tax deductible) or those with variable income who need lower repayments temporarily. For off-the-plan purchases, interest-only periods can provide flexibility during construction before settlement.
Key loan features to consider
Offset accounts
An offset account is a transaction account linked to your home loan. The balance in the offset reduces the loan amount used to calculate interest. For example, with a $500,000 loan and $50,000 in your offset account, you only pay interest on $450,000. Interest savings are calculated daily and can be substantial over the loan term. Offset benefits are not taxable (unlike savings account interest), and you maintain full access to your offset funds at all times.
Redraw facilities
A redraw facility allows you to access additional repayments you have made on your loan. This provides a financial buffer if you need extra funds without formally refinancing. Some redraw facilities have restrictions, minimum withdrawal amounts, or processing delays, so check the specific terms of your loan.
Flexible repayment frequency
Many lenders offer weekly, fortnightly, or monthly repayment options. Matching repayments with your pay cycle gives you more control over cash flow. Fortnightly repayments (26 per year) effectively result in 13 monthly payments rather than 12, which can shave years off your loan term and save thousands in interest.
Loan portability
Loan portability allows you to transfer your home loan from one property to another without applying for a new loan. This saves on discharge fees and application fees when you move. The new property typically must be of similar or greater value. Understanding this feature helps when considering your long-term pathway and future property moves.
Government schemes and loan structure
Your choice of loan structure should also factor in any government schemes you are using. The Home Guarantee Scheme works with most loan types and allows you to purchase with 5% deposit and no LMI. The Help to Buy Scheme has specific participating lenders with their own loan products. Ensure your genuine savings meet lender requirements, and use the FHSSS to build your deposit faster with tax advantages.
You can also combine your loan with NSW stamp duty concessions and the First Home Owner Grant ($10,000 on new homes) to reduce your overall upfront costs. Whether you are buying a freestanding house, a strata apartment, or land to build, the loan structure should match both the property type and your purchase method, be that private treaty, auction, or off the plan. Our property purchase and valuation guide explains how bank valuations affect your final loan terms, and our location, condition, and vibes guide helps you choose a property that aligns with your buying strategy.
Frequently asked questions
How do I know which loan type is best for me?
The right loan type depends on your financial stability and income certainty, your risk tolerance, your long-term property goals, your views on potential interest rate movements, and which features you need (such as offset accounts or extra repayment flexibility). A mortgage broker can provide personalised advice based on your specific circumstances and compare options across 35+ lenders.
What is the difference between comparison rate and advertised rate?
The advertised rate is the basic interest rate applied to your loan. The comparison rate includes both the advertised rate and most fees and charges, expressed as a single percentage. It provides a more accurate picture of the loan's total cost and is helpful when comparing different products. However, it may not include all potential costs such as break fees or conditional fee waivers.
Should I choose the loan with the lowest interest rate?
A low interest rate is important, but it is not the only consideration. You should also evaluate the loan's features and how they align with your needs, the overall fee structure and ongoing costs, flexibility for making additional repayments, and the lender's service quality. Understanding what first home buyers need to know includes evaluating loans beyond rate alone.
How long should I fix my interest rate for?
The ideal fixed-rate period depends on your need for repayment certainty, your outlook on interest rate movements, how long you plan to stay in the property, and your potential need for flexibility. Many first home buyers choose fixed terms of 2 to 3 years to balance certainty with flexibility. Longer terms (4 to 5 years) offer more certainty but may carry higher break costs if your circumstances change.
Can I make extra repayments on a fixed rate loan?
Most fixed rate loans allow additional repayments, but with limits. Extra repayments are typically capped at $10,000 to $30,000 per year during the fixed term, and exceeding these limits may trigger break costs. Some basic fixed rate loans do not allow additional repayments at all. After the fixed term ends, you can usually make unlimited extra repayments.
What happens at the end of a fixed rate period?
The loan usually reverts to the lender's standard variable rate, which is often higher than competitive market rates. You will be notified before the fixed term ends, and you can negotiate another fixed period, switch to variable, or refinance with another lender without break costs at that point. Being proactive as your fixed term ends ensures you do not end up on an uncompetitive revert rate.
How does an offset account save me money?
An offset account reduces the loan balance used to calculate interest. With a $500,000 loan and $50,000 in offset, you pay interest on $450,000. Savings are calculated daily. Offset benefits are not taxable (unlike savings account interest), and you maintain access to the funds. For higher income earners, offset accounts can be more beneficial than making additional repayments, as the savings compound over the loan term. Use our mortgage repayment calculator to model the impact.
Is it better to go direct to a bank or through a mortgage broker?
Going direct to a bank can be faster if you are an existing customer, and you may receive discounts on bundled products. Through a broker, you get access to 35+ lenders and products, personalised advice based on your situation, help finding the best rates and features for your circumstances, support with paperwork, and ongoing assistance throughout the loan term. For most first home buyers, a broker provides significant value through broader access and personalised service at no cost to you.
How often can I refinance my home loan?
You can refinance as often as you wish, but consider that refinancing costs are typically recouped after 1 to 2 years of interest savings, frequent applications may affect your credit score, some loans impose deferred establishment fees if refinanced within 3 to 5 years, and the process takes 4 to 6 weeks. Reviewing your loan every 2 to 3 years or when significant rate changes occur is generally good practice. Our home equity calculator helps you understand your refinancing position.
What is the difference between a package loan and a basic loan?
Package loans bundle your home loan with other financial products, offering discounted interest rates, waived fees on linked accounts and credit cards, and potential discounts on insurance. They typically include an annual package fee of $300 to $400. Basic loans are standalone with lower ongoing fees but fewer features and potentially higher interest rates. Package loans often suit borrowers with larger loans (over $250,000) or those who benefit from multiple products with the same institution.
Take the next step
Choosing the right finance is a decision that affects your finances for decades. Start by understanding your budget and deposit options, then secure pre-approval to confirm your borrowing capacity. Use our property deposit calculator, home equity calculator, and mortgage repayment calculator to model different loan scenarios.
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Related resources for first home buyers
Continue building your knowledge with our LVR guide to understand how your deposit affects loan terms, our LMI guide to understand when insurance applies, our pre-approval guide to start the application process, our first home buyers journey for the complete step-by-step process, and our budgeting guide to assess what you can comfortably afford.
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Please note that the views and opinions expressed in this post are general information only, and this is not financial advice.
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