Choosing the right finance
By Ali Hasani, Founder and Principal Mortgage Broker at Buyvest, MFAA accredited. Last updated July 2026. Rates, fees and product features vary between lenders and change regularly.
This guide covers fixed, variable and split home loans, what an offset account and a redraw facility actually do, what break costs are, and how to choose a structure rather than chase a rate.
The short version: Variable loans give you an offset account, unlimited extra repayments and no break costs. Fixed loans give you repayment certainty and usually cost you those features. Split loans take part of each. The lowest advertised rate is rarely the cheapest loan once fees and features are counted, so compare the comparison rate and the structure together.
Fixed vs variable home loan: which is better?
Neither is better in the abstract. Variable buys flexibility and features, fixed buys certainty, and the honest question is which of those is worth more to you over the next few years.
| Variable | Fixed | |
|---|---|---|
| Repayments | Move with the market | Locked for the fixed term |
| Offset account | Usually available in full | Rarely available, or partial only |
| Extra repayments | Unlimited | Typically capped, around $10,000 to $30,000 a year |
| Exiting early | No break costs | Break costs can run into thousands |
| If rates fall | You benefit | You do not |
| If rates rise | Repayments increase | You are protected until the term ends |
The trade most people miss: fixing usually means giving up your offset account. If you hold a meaningful balance, that feature can be worth more than the certainty. On a $600,000 loan, $50,000 sitting in an offset reduces the balance you pay interest on to $550,000, every day it sits there. Fix the whole loan and that saving disappears. This is often the single biggest factor in the decision, and it has nothing to do with predicting rates.
When variable makes sense
You have savings you can park in an offset, you want to make extra repayments without a cap, you may sell or refinance within a few years, or you would rather keep the flexibility than pay for certainty. It also suits buyers using the 5% Deposit Scheme who want to attack the loan and reach 80% LVR as quickly as possible.
When fixed makes sense
You are borrowing close to your limit and a rate rise would genuinely hurt, you need to know the exact repayment for budgeting, or you have little spare cash to put in an offset anyway, so you are giving up less by fixing. Terms usually run 1 to 5 years, and many first home buyers choose 2 to 3 to balance certainty against being locked in.
Split loans
A split divides the loan into a fixed portion and a variable portion. You get certainty on part of it and offset access plus unlimited extra repayments on the rest. Around 60% fixed and 40% variable is a commonly used structure, though the ratio should follow your circumstances rather than a convention. The variable portion is where your offset sits, so size it against the balance you actually keep.
The trade-offs are two accounts to manage, partial exposure to rate movements, and break costs still applying to the fixed portion if you exit early.
What are break costs and when do they bite?
Break costs are what a lender charges when you exit a fixed rate early. They are not a penalty fee but a calculation of the lender's loss, and they can run into thousands.
When you fix, the lender funds your loan at the rates available at that time. If you break the agreement and wholesale rates have fallen since, the lender is left funding a loan at a rate it can no longer earn, and it passes that shortfall to you. The larger the loan, the longer the remaining fixed term and the further rates have moved, the bigger the cost.
Three things trigger them, and only one is a decision you plan for.
- Selling the property during the fixed term, which is why fixing for five years suits someone certain they are staying put.
- Refinancing to another lender before the term ends, even to a better rate.
- Exceeding the extra repayment cap, which catches people who receive a bonus or inheritance and try to pay down the loan.
You can ask your lender for an indicative break cost figure at any time. If a life change is likely within the fixed period, that number is worth knowing before you commit rather than after.
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Offset account vs redraw: what is the difference?
Both reduce the interest you pay. An offset is a separate transaction account whose balance is netted against your loan. Redraw is money you have already paid into the loan and can take back out. The practical differences are access and tax.
With an offset, your money never leaves your control. It sits in an everyday account with a card and internet banking, and the lender simply calculates interest on the loan balance minus your offset balance. Interest is worked out daily, so even short-term parking helps. The saving is not taxable income, unlike interest in a savings account.
With redraw, the money has already been applied to your loan. Getting it back means requesting it, and lenders can impose minimum amounts, processing delays or limits. Some have reduced redraw availability at short notice in the past, which is a risk if you were treating it as an emergency fund.
The tax trap on investment loans. Interest deductibility follows the use of the funds. Money you take out through redraw is treated as new borrowing, so if you redraw from an investment loan and spend it on something personal, that portion of the loan may stop being deductible and your accountant has to apportion the interest from then on. An offset account avoids the problem entirely, because withdrawing your own savings is not a new borrowing. If you may ever convert the property to an investment, this is a reason to choose offset over redraw from the start. Speak with your accountant about your situation.
For an owner occupied loan you plan to keep as your home, the difference is mostly about access. For anything that might become an investment, offset is the safer structure.
What else should you compare?
The comparison rate, the fee structure, and whether the features you are paying for are ones you will actually use. The lowest advertised rate is often not the cheapest loan.
The comparison rate folds most fees into a single percentage, which makes products easier to compare than the headline rate alone. It does not capture everything, including break costs and some conditional waivers, so treat it as a better starting point rather than a final answer.
Package versus basic loans. A package bundles the loan with linked accounts and sometimes a credit card, discounting the rate and waiving fees, for an annual fee typically around $300 to $400. A basic loan has lower ongoing fees and fewer features. Packages tend to pay off on larger loans where the rate discount outweighs the fee, and basic loans suit smaller loans where it does not.
Repayment frequency. Paying fortnightly rather than monthly means 26 payments a year rather than 12, which is the equivalent of 13 monthly payments. Over a full term that can take years off the loan.
Portability lets you move the loan to a new property without a full new application, saving discharge and application fees when you move.
Loan term. Most loans run 25 to 30 years. A shorter term means higher repayments and considerably less total interest. Our mortgage repayment calculator shows the difference.
Principal and interest or interest only?
Principal and interest repays the loan and builds equity from the first payment. Interest only keeps repayments lower for a period but the balance does not reduce, so you build no equity while it lasts.
Principal and interest is the standard for owner occupiers and the right default. Interest only periods usually run 1 to 5 years, after which the loan reverts and repayments jump, because the same principal now has to be repaid over a shorter remaining term.
It has legitimate uses, mainly investment lending where interest may be deductible, or genuinely variable income where lower minimum repayments provide breathing room. For a first home purchase, particularly one with a small deposit, it usually works against you, because equity is the buffer that protects you. Tax treatment depends on your circumstances, so speak with your accountant before choosing interest only on an investment basis.
How do government schemes affect your loan choice?
They narrow the lender panel rather than the loan type. Scheme eligibility determines who will lend to you, and that constrains which products are on the table.
The Australian Government 5% Deposit Scheme works with most loan types across a wide panel including all major banks. Help to Buy has a much smaller panel, so product choice is narrower, and you cannot use both schemes.
If you are buying with a small deposit, the structure question matters more than usual. At 95% LVR you have almost no equity buffer, so a variable loan with an offset and unlimited extra repayments gives you the fastest route down to 80%, which is where LMI stops applying on any future refinance. Our benefits and risks guide covers that exit plan.
Frequently asked questions
Is a fixed or variable home loan better?
Neither in the abstract. Variable gives you an offset account, unlimited extra repayments and no break costs. Fixed gives you repayment certainty and usually costs you those features. If you hold savings you would park in an offset, that feature is often worth more than the certainty. If you are borrowing near your limit, certainty may be worth more. A split takes part of each.
Can I have an offset account on a fixed rate loan?
Rarely in full. Most lenders restrict or exclude offset accounts on fixed loans, and where one is offered it is often partial. This is one of the biggest hidden trade-offs of fixing, and a common reason borrowers choose a split so the offset can sit against the variable portion.
What are break costs?
What a lender charges when you exit a fixed rate early. It is a calculation of the lender's loss rather than a set fee, and it can run into thousands depending on your loan size, how long is left on the fixed term and how rates have moved. Selling, refinancing or exceeding your extra repayment cap can all trigger it. Ask your lender for an indicative figure before you commit.
What is the difference between an offset account and redraw?
An offset is a separate transaction account whose balance is netted against your loan for interest purposes, and you access it like any everyday account. Redraw is money you have already paid into the loan and request back, which can carry minimum amounts, delays or limits. Both reduce interest, but offset gives you better access and better tax treatment.
Is redraw a problem on an investment loan?
It can be. Interest deductibility follows the use of the funds, so money taken out through redraw is treated as new borrowing. Redraw from an investment loan for a personal purpose and that portion may stop being deductible. An offset avoids the issue, because withdrawing your own savings is not new borrowing. Speak with your accountant about your circumstances.
Can I make extra repayments on a fixed rate loan?
Usually, but with a cap, commonly around $10,000 to $30,000 a year. Exceeding it can trigger break costs. Some basic fixed products do not allow extra repayments at all. Once the fixed term ends you can generally repay without restriction.
What happens at the end of a fixed rate period?
The loan reverts to the lender's standard variable rate, which is often well above what is available to new customers. You can fix again, move to a competitive variable rate, or refinance elsewhere without break costs at that point. Diarise the expiry, because the revert rate is where lenders make their margin on inattentive borrowers.
Should I just take the lowest rate?
Not on its own. Check the comparison rate, which folds in most fees, then check whether the loan has the features you will actually use. A slightly higher rate with a full offset can cost less overall than a cheaper loan without one, if you hold a decent balance.
Is a package loan worth it?
It depends on loan size. Packages discount the rate and waive fees on linked accounts for an annual fee typically around $300 to $400. On a larger loan the discount usually outweighs the fee. On a smaller one a basic loan with lower ongoing fees often wins. Compare the total annual cost rather than the rate alone.
Next steps
Model the structures with our mortgage repayment calculator, then work out your position with the budgeting guide and pre-approval. Your LVR also affects which products and rates are available, so it is worth understanding before you compare.
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Related resources
Loan to Value Ratio | LMI explained | Pre-approval | Budgeting guide | Deposit options | Pre-approval to settlement | Refinancing
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This article is general information only and does not take your personal circumstances into account. Interest rates, fees, product features and lender policies change regularly, so confirm current terms before relying on them. Tax treatment of redraw, offset and interest only arrangements depends on your circumstances, so speak with your accountant. Ali Hasani is an Authorised Credit Representative (CRN 567392) of Connective Credit Services Pty Ltd (Australian Credit Licence 389328).
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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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