Beginner's Guide to Fixed, Variable & Split Loans

Choosing Between Fixed, Variable, and Split Structures

A fixed rate locks your interest rate for a set period, typically one to five years. A variable rate moves with market conditions and lender decisions. A split loan divides your borrowing between both structures. The decision depends on how much certainty you want over repayments versus how much flexibility you need for extra payments or potential rate drops.

Consider someone working as a legal assistant on a salary of $65,000 who's borrowing 90% on an owner-occupied purchase. Their monthly budget is tight enough that a rate rise of 0.50% would create genuine pressure. They might lock in 70% of the loan on a three-year fixed rate, keeping 30% variable. If rates fall, they benefit partially. If rates rise, most of their loan is protected. They can still make extra payments on the variable portion without triggering break costs.

How Variable Rates Work in Practice

Variable rates change when lenders adjust their pricing in response to Reserve Bank movements or funding cost shifts. Your repayments can increase or decrease without notice, though lenders typically announce changes a few weeks in advance. You pay interest only on the outstanding balance, so extra payments reduce the principal immediately and lower the interest charged from that point forward.

Most variable rate home loans offer an offset account. This is a transaction account linked to your loan. The balance in the offset reduces the amount of interest you're charged without reducing the loan balance itself. If you have a $400,000 loan and $15,000 in your offset, you pay interest on $385,000. The full loan balance remains, but the interest saved compounds over time. For someone in a legal role with irregular bonuses or trust account work that generates short-term savings, an offset can be more valuable than a lower headline rate.

Fixed Rate Periods and What Happens When They End

Fixed terms run from one to five years, with three years being the most common choice. During the fixed period, your rate and repayment amount don't change. You can't make extra payments beyond a small annual limit, usually $10,000 to $30,000 depending on the lender. If you try to pay more, refinance, or sell the property before the fixed term ends, the lender will charge break costs based on the difference between your fixed rate and the current wholesale rate they're lending at.

When the fixed term ends, your loan automatically moves to the lender's standard variable rate unless you've arranged to refix or refinance beforehand. That standard rate is often higher than the discounted variable rate offered to new borrowers. If you took a three-year fix and haven't reviewed your loan six months before expiry, you'll likely end up paying more than you need to. Setting a calendar reminder for six months before your fixed rate expiry lets you compare options while you still have time to act.

Split Loan Structures and Why They're Used

A split loan divides your total borrowing into separate accounts with different rate structures. You might fix 50% for three years and keep 50% variable, or split into three portions with different fixed terms. Each portion has its own balance, rate, and repayment amount. The total monthly repayment is the sum of all portions.

The main reason to split is balancing certainty with flexibility. If you fix the entire loan and rates drop, you're locked in. If you keep it all variable and rates rise sharply, your repayments can increase faster than your income. A split gives you partial protection while leaving room to take advantage of rate falls or make extra payments on the variable portion. You can also stagger fixed terms so portions expire at different times, letting you adjust gradually rather than all at once.

Offset Accounts and How They Reduce Interest

An offset account is only available on variable loans or the variable portion of a split. The account works like a regular transaction account. You can deposit your salary, pay bills, and withdraw funds whenever you need to. The difference is that the balance offsets your loan for interest calculation purposes.

If you're earning $65,000 as a legal assistant and you manage to keep an average offset balance of $12,000, that's $12,000 less loan balance being charged interest each day. At a variable rate of 6.00%, that saves you around $720 per year in interest. The saving increases as your offset balance grows. The key is treating the offset as your primary transaction account so all your income flows through it and sits there until you need to spend it.

Principal and Interest vs Interest Only Structures

Most owner-occupied home loans require principal and interest repayments. Each monthly payment includes interest on the outstanding balance plus a portion that reduces the loan itself. Over time, the interest component decreases and the principal component increases, so you build equity and eventually pay off the loan.

Interest only means you pay only the interest charged each month. The loan balance doesn't reduce unless you make extra payments. This structure is more common on investment loans where the interest is tax deductible and the borrower wants to maximise cash flow. For owner-occupied loans, interest only is usually only approved for short periods during construction or financial hardship. Your monthly repayment is lower during the interest only period, but you're not building equity through repayments and the loan balance remains unchanged.

How Rate Discounts Work and When They Change

Lenders advertise a standard variable rate, then offer discounts based on loan size, deposit size, and whether you're a new customer. A lender might have a standard rate of 7.50% but offer a 1.30% discount to new borrowers with a deposit above 20%, bringing the rate to 6.20%. Existing customers on older loans often don't receive the same discount unless they ask or refinance.

Discounts aren't permanent. A lender can reduce your discount or remove it entirely by increasing their standard rate without increasing the discounted rate, or by writing to you and reducing the discount directly. The loan contract allows this. If you're on a discounted variable rate, it's worth reviewing annually to confirm you're still receiving a competitive discount relative to what new borrowers are getting. If the gap is more than 0.30%, refinancing or negotiating with your current lender usually makes sense.

When Fixed Rates Make Sense and When They Don't

Fixed rates suit borrowers who value certainty and whose budget doesn't allow for rate increases. If you're early in your career as a legal assistant and your income is growing steadily but not quickly, knowing your exact repayment amount for the next three years removes one variable from your financial planning. You can budget confidently and know you won't be forced to cut spending if rates rise.

Fixed rates don't suit borrowers who expect to receive lump sums they want to use to pay down the loan, or who might sell or refinance within the fixed period. If you're expecting an inheritance, bonus, or you're planning to move interstate for work within two years, a variable loan gives you the flexibility to act without penalty. The same applies if you're buying a unit in a building with cladding issues or other defects that might require you to sell earlier than planned.

Portable Loans and Changing Properties

Some lenders offer portable loans, meaning you can take the loan with you if you sell your current property and buy another during the fixed term. This avoids break costs. The lender reassesses your borrowing capacity and the new property's suitability, but if both are acceptable, the loan transfers across with the same rate and terms.

Not all lenders offer portability, and those that do often have conditions. The new purchase must settle within a few months of the sale, and the loan amount can't increase beyond a small margin. If you need to borrow more, the additional amount will be on a new rate. Portability is useful if you're buying in a suburb where you expect to upgrade within a few years but want rate certainty now.

Applying for a Loan and What Gets Assessed

Lenders assess your income, expenses, existing debts, and the property's value. For someone working as a legal assistant in a law firm, income verification requires payslips and often a letter from your employer confirming your role and salary. If you've been in the role for less than six months, some lenders won't lend or will require a longer employment history. If you've been there more than a year, most lenders are comfortable.

Your expenses are assessed using either your actual spending or a benchmark figure called the Household Expenditure Measure, whichever is higher. Lenders also apply a buffer to the interest rate, usually adding 3.00%, to confirm you could still afford repayments if rates rose sharply. This means even if the current rate is 6.00%, the lender tests your ability to repay at 9.00%. If you're borrowing close to your maximum capacity, a split or fixed loan might help you meet the serviceability test because the repayment is lower during the fixed period.

What Happens If You Want to Refinance Before the Fixed Term Ends

Refinancing during a fixed term triggers break costs. The lender calculates these based on the difference between your fixed rate and the current wholesale funding rate for the remaining fixed period. If you fixed at 5.50% for five years and wholesale rates have since fallen to 4.80%, the lender has lost the ability to invest the prepaid amount at your higher rate. They charge you the difference.

Break costs can range from a few hundred dollars to tens of thousands depending on how much rates have moved and how long remains on your fixed term. Lenders provide a break cost estimate if you ask, but the final figure is calculated on the day you discharge the loan. If you're considering refinancing and you have a fixed loan, request an estimate first and factor it into the comparison. Sometimes the saving from a lower rate elsewhere outweighs the break cost, but often it doesn't.

Building Equity and How Loan Structures Affect It

Equity is the difference between your property's value and your outstanding loan balance. You build equity by paying down the principal or by the property increasing in value. A principal and interest loan builds equity through repayments. An interest only loan relies entirely on property value growth unless you make extra payments voluntarily.

If you're on a fixed loan with limited extra payment capacity, you build equity more slowly than on a variable loan where you can make unlimited extra payments. For someone in the legal sector with a stable income and the ability to save, a variable loan with an offset or redraw facility lets you build equity faster. That equity can later be used for upgrading to your next home or purchasing an investment property.

Call one of our team or book an appointment at a time that works for you to discuss which loan structure suits your current role, income trajectory, and plans for the next few years.

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