Top Tips to Understand Fixed Rate Loans and Extra Repayments

Understanding Fixed Rate Home Loans

When you're looking at home loan options as an ADF member, one of the key decisions you'll face is choosing between a variable rate, fixed rate, or split loan structure. A fixed interest rate home loan locks in your interest rate for a set period - typically between one and five years. This means your repayments stay the same regardless of what happens in the broader market, giving you certainty and making budgeting much more manageable.

For current and former Australian Defence Force members, this predictability can be particularly valuable. Whether you're deployed, on posting, or transitioning out of service, knowing exactly what your home loan repayments will be each month provides genuine financial stability. You won't need to worry about rate rises affecting your capacity to meet your mortgage obligations.

However, there's an important consideration that catches many people off guard: the restrictions around extra repayments on fixed interest rate home loans.

The Extra Repayments Limitation

Here's what you need to know upfront - most fixed rate home loan products come with limits on how much extra you can pay above your minimum repayment. These restrictions exist because lenders have already locked in funding costs based on your agreed repayment schedule. When you pay off your loan faster than expected, it can impact their planning and profitability.

Typically, lenders allow you to make extra repayments of around $10,000 to $30,000 per year on a fixed interest rate home loan without penalty. The exact amount varies between lenders and specific home loan packages. If you exceed this threshold, you'll usually face what's called a break cost or early repayment fee.

These break costs can be substantial - sometimes running into thousands of dollars. They're calculated based on the difference between your fixed interest rate and current market rates, the remaining time on your fixed period, and how much extra you're repaying beyond the allowed limit.

When Extra Repayments Make Sense

Despite these limitations, making extra repayments within the allowed limits can still help you build equity and reduce the overall interest you'll pay over the life of your loan. Even an additional $5,000 or $10,000 per year can shave years off your loan term and save you considerable money in interest charges.

For ADF members who receive deployment allowances, bonuses, or other additional income, making regular extra repayments up to the limit is a smart strategy. You're building equity in your property while maintaining the security of fixed repayments.

Some key benefits of making extra repayments include:

• Reducing your loan amount faster, which means less interest paid overall
• Building equity more quickly, which can improve borrowing capacity for future purchases
• Lowering your loan to value ratio (LVR), potentially helping you avoid or reduce Lenders Mortgage Insurance (LMI) when refinancing
• Creating a buffer that can help if your circumstances change

Alternative Options for ADF Members

If you're concerned about extra repayment restrictions but still want some rate certainty, consider these home loan features:

Split Rate Loans

A split loan allows you to divide your loan amount between fixed and variable portions. You might fix 50-70% of your loan for rate security, while keeping the remainder on a variable interest rate. The variable portion can typically accept unlimited extra repayments without penalty, giving you flexibility while maintaining some protection against rate rises.

Offset Accounts

Some fixed rate home loan products offer a linked offset or mortgage offset account. While less common than with variable rate loans, these accounts let you park savings that offset the interest charged on your loan. Your money remains accessible while still reducing your interest costs - giving you similar benefits to making extra repayments without actually paying down the principal.

Portable Loans

For ADF members who may need to relocate on posting, a portable loan lets you transfer your existing home loan to a new property without breaking your fixed rate period. This can save you from paying break costs if you need to sell and purchase again while your rate is still fixed.

Questions to Ask When Comparing Rates

Before you apply for a home loan with a fixed interest rate, make sure you understand:

1. What's the maximum extra repayment allowed per year without penalty?
2. How are break costs calculated if you exceed the limit?
3. Can you make lump sum payments or do they need to be spread throughout the year?
4. What happens when your fixed rate period ends - will you automatically revert to variable home loan rates?
5. Are there any interest rate discounts or rate discount options available specifically for ADF members?

Defence Loans works with banks and lenders across Australia to access home loan options that recognise the unique circumstances of Defence Force members. This includes no LMI loans for ADF members that can save you thousands in upfront costs.

Making the Right Choice for Your Situation

The decision between fixed, variable, or split rate structures depends on your personal circumstances. If you value certainty and don't anticipate having large amounts available for extra repayments, a fixed interest rate home loan could be ideal. If you're expecting regular bonuses or extra income that you'd like to put towards your mortgage, a variable rate or split loan might serve you better.

Consider your career stage too. If you're early in your Defence career with potential for income growth and promotions, having the flexibility to make substantial extra repayments might be more valuable than rate certainty. Conversely, if you're planning for retirement or want predictable outgoings during deployment, fixing your rate makes sense.

For those looking at their first home loan or buying your next home, understanding these options is crucial. The home loan application process becomes much smoother when you know exactly what you're looking for.

Taking Action

Whether you're looking to achieve home ownership, invest in property, or refinance your current home loan rates, understanding the fine print around extra repayments on fixed rate products is essential. The lowest rates aren't always the right choice if the loan features don't match your needs.

If you're unsure whether a fixed rate, variable rate, or split loan is right for your situation, or if you want to compare rates across multiple lenders, speaking with a specialist who understands Defence Force circumstances can help clarify your options. We can help you access home loan options from banks and lenders across Australia, including those offering specific benefits for ADF members.

Our team understands owner occupied home loan options, investment property lending, and everything in between. Whether you need home loan pre-approval before house hunting or want a loan health check on your existing mortgage, we're here to help.

Call one of our team or book an appointment at a time that works for you. We'll help you understand your borrowing capacity, compare home loan products, and find the right solution for your situation.