Fixed Rate Terms and What Not to Lock In

Fixed or Variable When You're Buying Your First Home

Most first home buyers go with a split loan rather than fixing the whole amount. You fix part of it for certainty on repayments, and leave the rest variable so you can pay extra or use an offset account without penalty. The split protects you from rate rises while keeping access to features that help you pay down debt faster.

Consider a buyer purchasing in Petersham who fixes 60% of a $650,000 loan at a fixed rate for three years, leaving the remaining 40% variable with an offset attached. During the fixed period, repayments on the fixed portion stay the same regardless of rate movements. The variable portion can absorb extra repayments from rental income or bonuses. When the fixed term ends, the fixed portion reverts to a variable rate unless the buyer refixes or refinances at that point.

The trap is fixing 100% of the loan because it felt safer at settlement, then realising two years in that you can't make extra repayments or redraw without break costs. If your income increases or you receive a windfall, those funds sit in a savings account earning minimal interest instead of reducing your loan balance. In our experience, buyers who fix everything regret it when their circumstances change and the loan structure can't adapt.

A split loan means the variable portion keeps working for you while the fixed portion keeps your repayments predictable. You decide the split percentage based on how much certainty you need versus how much flexibility you want to retain. There's no universal ratio, it depends on your income stability and whether you expect lump sums or pay rises during the fixed period.

How Long Should You Fix a Home Loan

One, three, or five year terms are the most common, and most first home buyers in Petersham choose either one or three years. A one year fixed term gives you certainty through settlement and the first twelve months of ownership without locking you in long term. A three year term covers the period when your budget is tightest and rate movements would hurt the most. A five year term only makes sense if you're certain your income and circumstances won't change and you're willing to accept higher break costs if they do.

The longer the fixed term, the less flexibility you have and the higher the cost to exit early. Break costs are calculated based on the difference between your fixed rate and the lender's current wholesale cost of funds for the remaining fixed period. If you fixed at 6.2% for five years and rates drop to 5.5% after two years, breaking that loan could cost tens of thousands of dollars because the lender loses the income they priced into your rate.

We regularly see buyers choose a three year fixed term because it matches the timeframe they're confident about. They know their job is stable, they're not planning kids or a move, and three years feels manageable. After three years, circumstances have usually shifted enough that reassessing the loan structure makes sense anyway. Fixing for five years assumes nothing changes, and that's rarely true for someone buying their first home in their late twenties or early thirties.

If you're buying an older terrace in Petersham that might need a bathroom reno or rewiring in the next few years, a shorter fixed term or a split loan gives you the option to redraw or offset funds for those works without penalty. Fixing the whole loan for five years means those costs either sit on a credit card or you pay break costs to access your equity.

What Happens When Your Fixed Rate Ends

Your loan reverts to the lender's standard variable rate unless you take action before the fixed period expires. The standard variable rate is usually higher than the advertised variable rate for new customers, sometimes by 0.3% to 0.5%, which can add hundreds of dollars a month to your repayments. Lenders notify you around 30 to 90 days before expiry, but it's your responsibility to act.

You have three options at expiry. You can refix with the same lender at current fixed rates, switch to their variable rate, or refinance to a different lender. Refinancing often gets you a lower rate than refixing with your current lender because new customer rates are more competitive than retention rates. If your property has increased in value since purchase and you've been paying down the loan, your loan to value ratio has improved, which can qualify you for better pricing.

As an example, a buyer who purchased in Petersham with a 10% deposit and fixed for three years may have built enough equity through repayments and moderate capital growth that their LVR has dropped from 90% to 80%. At the three year mark, refinancing to a new lender at an 80% LVR rate avoids LMI and usually means a lower interest rate than staying put. The refinance also resets your loan features, so you can add an offset account or switch to a package with lower fees if those weren't available on your original loan.

Don't assume your current lender will offer you their most competitive rate without asking. Call them or get your broker to negotiate before the fixed term ends. If they won't budge, refinancing is often worth the effort. Refinance costs are typically between $1,000 and $2,000 depending on valuation and discharge fees, and those costs are usually recovered within the first year through the lower rate.

Fixed Rates and the First Home Buyer Schemes

The Australian Government 5% Deposit Scheme allows you to purchase with a 5% deposit and no LMI, and you can choose a fixed rate, variable rate, or split loan depending on which lender you go through. Not all lenders on the scheme panel offer the same loan features, so if you want to fix part of the loan and keep an offset on the variable portion, confirm that structure is available with your chosen lender before applying.

The scheme has a property price cap of $1,500,000 for Sydney, which covers almost all properties in Petersham. Stamp duty concessions in NSW give you a full transfer duty exemption on homes valued up to $800,000, and a sliding concession on properties between $800,001 and $1,000,000. These concessions apply to both new and established homes and can be used alongside the 5% Deposit Scheme, which means you can access both the deposit support and the duty saving at the same time.

If you're using the 5% Deposit Scheme and buying an established terrace or unit in Petersham, the stamp duty saving alone could be $30,000 or more depending on purchase price. That saving doesn't reduce your borrowing power, but it does reduce the cash you need at settlement, which means you can keep more funds in your offset account from day one instead of using them all on upfront costs.

When comparing fixed rates between lenders on the scheme panel, look at the comparison rate as well as the advertised fixed rate. The comparison rate includes fees and gives you a better sense of the true cost over the life of the loan. A fixed rate that looks lower might come with higher application or ongoing fees that make it more expensive overall. Your broker can run the numbers across multiple lenders to show you the total cost rather than just the headline rate.

Split Loans and How the Offset Works on the Variable Portion

An offset account is a transaction account linked to your home loan where the balance reduces the interest charged on the variable portion of your loan. If you have $20,000 in your offset and $300,000 on the variable portion of your loan, you only pay interest on $280,000. The offset balance doesn't earn interest, but the interest you save on the loan is usually higher than the interest you'd earn in a savings account after tax.

You can't offset against a fixed rate loan because the interest is locked in for the fixed period. If you fix 60% of your loan and leave 40% variable with an offset, the offset only works against the variable portion. That's why the split percentage matters. If you fix too much, the offset has less impact. If you fix too little, you lose the repayment certainty you were aiming for.

In our experience, buyers in Petersham who work in the city or inner west often receive annual bonuses or have irregular income from side work. An offset lets them park that money and reduce interest without committing it permanently to the loan. If they need the funds for a car repair or a holiday, the money is still accessible. If they don't need it, it's working to reduce the loan balance by lowering the interest charged each month.

Some lenders charge a monthly fee for an offset account, usually between $10 and $20. If your offset balance is consistently low, the fee might cost more than the interest you save. Run the numbers before adding the offset, and if your balance is usually under $5,000, you're probably losing money on the fee. If your balance is consistently above $15,000, the offset pays for itself many times over.

Call one of our team or book an appointment at a time that works for you. We're based locally and we've helped plenty of buyers in Petersham work out the right split and fixed term for their situation.

Frequently Asked Questions