When to Choose Fixed, Variable or Split Rate Loans

Your choice between fixed, variable and split rate structures determines whether you can respond to interest rate movements, access redraw when posted, and pay down principal during shore postings.

Fixed Rate Loans Lock Your Repayments for a Set Period

A fixed rate loan holds your interest rate and repayments steady for one to five years. You know exactly what you'll pay each fortnight regardless of what the Reserve Bank does. If rates rise during your fixed period, you're protected. If rates fall, you're locked in.

Consider a scenario like this: a Navy member posted to HMAS Cairns fixes their loan at 5.9 per cent for three years. Six months later, the variable rate drops to 5.3 per cent. They're now paying 0.6 per cent more than they would on a variable loan, but their repayments haven't changed and they can budget with certainty through the remainder of their posting.

Fixed rate loans typically restrict extra repayments to around $10,000 to $30,000 per year depending on the lender. If you break the fixed period early by refinancing or selling, you'll face break costs calculated on the difference between your fixed rate and the rate the lender can now lend that money at. Those costs can run into thousands of dollars. Most home loans for Navy members allow you to choose fixed, variable or split structures depending on your deployment and posting cycle.

Variable Rate Loans Respond to Market Movements and Give You Full Flexibility

A variable rate loan changes with the lender's standard rate, which typically moves in line with the Reserve Bank's cash rate decisions. When rates fall, your repayments drop. When rates rise, so do your repayments. You can make unlimited extra repayments, redraw funds when needed, and access offset accounts to reduce interest without locking funds away.

In our experience, Navy members on variable rate loans use redraw and offset features during deployment to manage cash flow when living expenses drop and income increases with sea allowances. Variable rate loans suit borrowers who want control over repayments and access to equity without penalties. You won't face break costs if you refinance or sell.

Variable rates sit higher than fixed rates in most market conditions because they carry more flexibility and risk for the lender. At current variable rates, an owner-occupied loan with an offset account typically sits between 6.0 and 6.5 per cent depending on your deposit size and lender.

Split Rate Loans Combine Fixed Certainty with Variable Flexibility

A split rate loan divides your borrowing between a fixed portion and a variable portion. You might fix 50 per cent of the loan at 5.8 per cent for three years and leave the other 50 per cent on a variable rate at 6.2 per cent. The fixed portion gives you stable repayments. The variable portion lets you make extra repayments, access redraw, and link an offset account.

Split loans suit Navy members who want partial protection from rate rises but still need access to funds during posting cycles. You're not fully exposed to rate movements, and you're not fully locked in. The split ratio can be adjusted to match your risk tolerance and cash flow needs. Common splits are 50/50, 60/40 or 70/30, though any ratio is possible.

If you decide to refinance or sell, you'll only face break costs on the fixed portion. The variable portion can be repaid in full without penalty. Home loan refinancing for ADF members is often structured as a split to manage break costs on existing fixed loans while accessing lower rates on the variable portion.

Interest-Only Repayments Reduce Cash Flow Pressure but Don't Build Equity

Interest-only repayments apply only to the interest charged each period, leaving the loan balance unchanged. You're not paying down principal, so you're not building equity through repayments. Interest-only periods typically run for one to five years on owner-occupied loans and up to ten years on investment loans, depending on the lender and your loan-to-value ratio.

Interest-only structures suit Navy members holding a property while posted interstate or overseas, or those purchasing an investment property where negative gearing and capital growth are the focus. Once the interest-only period ends, the loan reverts to principal and interest repayments, and those repayments will be higher than if you'd been paying principal from the start because the loan term is now shorter.

If your LVR sits above 80 per cent, lenders may restrict interest-only approval or require you to revert to principal and interest repayments sooner. Interest-only loans still allow offset accounts and redraw on the variable portion, so you can deposit funds to reduce interest without formally paying down the loan.

Offset Accounts Reduce Interest Without Locking Funds Into the Loan

An offset account is a transaction account linked to your home loan. The balance in the offset account is subtracted from your loan balance before interest is calculated each day. If you have a $500,000 loan and $30,000 in your offset account, you're charged interest on $470,000.

Offset accounts are available on variable rate loans and the variable portion of split rate loans. They're not available on fixed rate loans in most cases, though some lenders offer partial offset on fixed loans with reduced interest savings.

Navy members regularly use offset accounts to hold deployment allowances, sea pay, and other variable income that might be needed for posting costs or leave expenses. The funds remain accessible while reducing the interest charged on the loan. Full offset accounts deliver a dollar-for-dollar reduction in interest. Partial offset accounts reduce interest by a percentage of the balance, typically 40 to 60 per cent, and are less common.

Principal and Interest Repayments Build Equity and Reduce the Loan Balance Over Time

Principal and interest repayments include both the interest charged and a portion of the loan balance. Each repayment reduces what you owe and builds equity in the property. The earlier you are in the loan term, the more of each repayment goes to interest. As the loan balance falls, more of each repayment goes to principal.

Principal and interest loans are required for most low deposit loans for ADF members where the LVR sits above 90 per cent. Lenders view principal repayment as a risk control because it reduces the outstanding balance and the loan-to-value ratio over time. If you're accessing the 5% Deposit Scheme, the loan must be structured as principal and interest from settlement.

You can still make extra repayments on a principal and interest loan, and most variable rate loans allow redraw of any additional principal you've paid. The minimum repayment is set by the lender based on the loan term and interest rate, but you're not restricted to that minimum unless the loan is fixed.

Rate Discounts Apply Based on Your Loan Amount, LVR and Relationship with the Lender

Lenders publish standard variable and fixed rates, then apply discounts based on your loan size, deposit, and whether you hold other products with the institution. A 1.0 per cent discount on a 7.2 per cent standard variable rate brings your rate to 6.2 per cent. Discounts typically range from 0.6 to 1.4 per cent depending on the loan amount and LVR.

Defence members may access additional rate discounts through ADF-specific loan products that waive LMI and reduce rates by a further 0.1 to 0.3 per cent. Those discounts apply on top of standard LVR-based pricing. Comparison across lenders involves looking at the rate after all discounts are applied, not the headline standard rate.

Rate discounts are not guaranteed for the life of the loan. Lenders can reduce or remove discretionary discounts on variable rate loans at any time, though they typically apply changes across the portfolio rather than targeting individual borrowers. Fixed rate discounts are locked in for the fixed period.

Call one of our team or book an appointment at a time that works for you. We'll walk through your posting cycle, cash flow during deployment, and whether fixed, variable or split structures give you the control and certainty you need without locking you into a loan that doesn't match your service pattern.

Frequently Asked Questions