The Pros and Cons of Fixed Rate Loans and Extra Repayments

A fixed rate gives you certainty, but it can limit how quickly you pay your loan down.

If you are buying your first home in St Kilda East, that trade-off is worth understanding before you sign. Many fixed rate loans cap the extra repayments you can make each year, and a loan that suits your budget today should also suit your plans for the next few years. A broker can check these limits with you before you commit.

What Is a Fixed Interest Rate and How Does It Work for a First Home Buyer?

A fixed interest rate stays the same for an agreed period, so your repayment does not change during that time. After the fixed period ends, the loan usually moves to a variable rate unless you fix again or refinance.

This suits buyers who want a predictable budget while they settle into a new home. The main trade-off is flexibility. Lenders often limit extra repayments on fixed loans, and leaving a fixed loan early can trigger break costs. Features such as an offset account or redraw may also be restricted or unavailable on a fixed portion, depending on the lender.

If your fixed term is coming to an end, our fixed rate expiry page explains your choices.

The Pros of Fixing Your Rate

The biggest benefit of fixing is repayment certainty. You know what leaves your account each month, which makes planning your first home buyer budget much clearer.

It also gives you breathing room. Moving costs, furniture and new household expenses often arrive together, and a steady repayment can make that period feel calmer. If variable rates rise during your fixed term, your repayment stays the same.

The flip side is that you do not benefit if variable rates fall. You are locked in, and you may pay more than a variable borrower would.

The Cons of Fixing Your Rate

The main drawbacks are limited extra repayments and possible break costs. Both can matter if your income rises or you receive a lump sum.

Many lenders cap how much extra you can pay on a fixed loan each year. If you go over the cap, you may be charged a fee, or the lender may refuse the payment. Break costs can apply if you pay the loan out early, refinance or switch to another product during the fixed term. The cost depends on the lender and on how rates have moved, so it can be large or small.

Do Extra Repayments Make Sense on a Fixed Rate Loan?

Extra repayments make sense if your fixed loan allows them and you are comfortable with the cap. They reduce your balance sooner, which reduces the interest charged on it.

The cost is access to your money. On many loans, you cannot easily get extra repayments back once they are paid. A redraw facility can help, but the rules differ between lenders and some fixed loans do not offer it. Before paying extra, keep an emergency buffer in a separate account.

Example: Splitting a Loan Between Fixed and Variable

A split loan can give you certainty on part of the debt and flexibility on the rest. Many lenders allow you to divide your loan into a fixed portion and a variable portion.

Consider a first home buyer in St Kilda East who borrows $600,000 and is nervous about rate rises. They also expect a bonus each year and want to put it toward the loan. In a scenario like this, they split the loan into $400,000 fixed and $200,000 variable.

Using an illustrative rate of 6.75% p.a. over 30 years on the whole $600,000, the principal and interest repayment is about $3,891 a month. This is an example only, as actual rates vary by lender and your deposit size. The fixed portion keeps about two thirds of the repayment predictable. The variable portion can take bonus payments without a cap, and it can be linked to an offset account if the lender offers one, which reduces the interest charged on that portion.

The outcome is a balance. The buyer cannot pay the fixed portion down faster than the lender allows, but the variable portion can absorb their bonus each year. The trade-off is that the variable portion moves with rates, so that part of the repayment can rise. Use a repayment calculator to test different splits for your own numbers.

What Should You Ask a Lender About Extra Repayments?

Ask for the annual extra repayment cap, any fees for exceeding it, and whether redraw or an offset account is available on the fixed portion. These answers shape how useful the loan is for you.

Also ask what happens when the fixed term ends, and how break costs are calculated if you refinance early. When you apply for a home loan, a broker can compare these features across lenders for you. Our home loans page outlines the options we work with, and our borrowing capacity page can help you see what you may be able to borrow.

Government Support Can Work Alongside Your Loan Choice

Some government schemes may reduce what you need to save or borrow, and eligibility rules apply. In Victoria, a first home buyer may qualify for no land transfer duty on a dutiable value up to $600,000, with a concession above that up to $750,000. Conditions apply, including living in the home for at least 12 months.

The federal 5% Deposit Scheme lets eligible first home buyers purchase with a 5% deposit without paying lenders mortgage insurance. The Victorian price cap is $950,000 for capital city and regional centres, and applications go through a participating lender. These schemes have separate rules, so confirm your eligibility before relying on them. Our first home buyers page covers more, and the buying your first home page walks through the process.

If you live nearby, our St Kilda East mortgage broker page has local details.

Call one of our team or book an appointment at a time that works for you. We will help you choose a loan that suits your first home and your plans for paying it off.

Frequently Asked Questions