Variable Rate Loans
Variable rate loans change with market interest rates (set by the RBA and then passed on by lenders). When rates fall, you pay less; when rates rise, you pay more. Variable rates typically have more flexibility: unlimited extra repayments, redraw facilities, and offset accounts. Most Australian home loans are variable.
Fixed Rate Loans
Fixed rate loans lock in an interest rate for a set period (1–5 years). Your repayments don't change if rates rise — but you also miss out if rates fall. Fixed loans typically limit extra repayments (usually to $10,000–$20,000 per year) and generally don't allow offset accounts. Useful for budgeting certainty and as a hedge against rising rates.
Split Loans
A split loan fixes a portion of your mortgage and leaves the rest variable. For example: fix 60% of your loan for certainty on most of your repayment, while keeping 40% variable with full flexibility for extra repayments. This hedges against both rate rises and rate falls — the most popular structure in periods of rate uncertainty.
Offset Accounts
An offset account is a savings account linked to your mortgage. The balance in the offset account reduces the principal on which interest is calculated. $100,000 in an offset account on a $500,000 mortgage means you only pay interest on $400,000. This is one of the most effective debt reduction strategies available to Australian homeowners.
Pro tip: Keep all savings in your offset account rather than a separate savings account. Even though the savings account might offer 5% interest, your mortgage interest rate is likely higher — the offset is always more efficient.
Redraw Facility
A redraw facility allows you to make extra repayments on your home loan and then 'redraw' those funds if needed. Unlike an offset account (which technically isn't part of your loan), redraw funds are money you've already paid into your loan and are subject to lender discretion in some cases. Offset is generally preferable if you might need access to the funds.
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