Fixed Rate Loans & What First Home Buyers Need to Know

A fixed rate loan locks in your interest rate for a set term, protecting you from rate rises but limiting access to features like offset accounts and penalty-free extra repayments.

Most lenders offer fixed terms from one to five years, with three years being the most common choice among buyers. The term you pick affects what happens when rates move, how much flexibility you keep during the fixed period, and what your loan looks like when the fixed term ends. For first home buyers in Hampton, where the median purchase price sits above the Victorian metro average, that choice can influence your borrowing capacity and your options if circumstances change.

Why the Fixed Term Length Matters More Than the Rate Alone

The fixed rate itself tells you what your repayments will be during the fixed period. The term tells you how long that certainty lasts and what risks or trade-offs you accept in exchange.

Consider a buyer purchasing a unit near Hampton Station at the suburb's current median. They lock in a three-year fixed rate at the time of settlement. If variable rates fall during those three years, they continue paying the higher fixed rate and miss the benefit of the drop. If variable rates rise, they avoid the increase and their repayments stay unchanged. But if they need to sell or refinance before the three years are up, they may face break costs that can run into the thousands depending on how much the lender's funding costs have shifted since the loan was written.

A one-year fixed term shortens your exposure to those risks but gives you less protection if rates climb. A five-year term extends the certainty but locks you out of offset accounts and penalty-free extra repayments for longer, and increases the chance that your circumstances or the market will shift before the term ends.

Split Loans: Fixing Part and Keeping Part Variable

You do not have to choose between fixing everything or fixing nothing. A split loan divides your borrowing into two portions, one fixed and one variable, each with its own interest rate and features.

The variable portion lets you link an offset account, make unlimited extra repayments without penalty, and redraw funds if the lender permits. The fixed portion gives you stable repayments on that slice of the loan. If rates rise, the fixed portion shields part of your monthly commitment. If rates fall, the variable portion drops with them, and you still benefit on that side of the split.

In our experience, buyers who expect their income or expenses to shift in the next few years tend to favour splits that keep at least 40% to 50% of the loan variable. That leaves enough room to park savings in an offset or pay down the variable portion when a bonus or tax refund comes through, without triggering break costs on the fixed side. The exact split comes down to how much rate protection you want versus how much liquidity and flexibility you need during the loan term. Your first home loan application can include a split structure from the outset if your lender offers it.

What Happens When Your Fixed Term Ends

When the fixed period expires, your loan does not disappear. It rolls onto the lender's standard variable rate unless you take action before the end date.

Most lenders send a notice 30 to 90 days before the fixed term ends, outlining your options: you can refix at the prevailing rate for a new term, switch to variable, or refinance to another lender. The rate you refix at will be whatever the lender is offering at that time, not the rate you had during the previous fixed period. If you do nothing, the loan converts to variable automatically.

Buyers sometimes assume they will refix at a similar rate to the one they started with. That only happens if market conditions at the expiry date are similar to the conditions when you first fixed. Rates may be higher or lower depending on what the Reserve Bank and the bond market have done in the intervening years. If you want to avoid rolling onto a variable rate you have not planned for, set a calendar reminder for three months before your fixed term ends and review your options with your broker at that point. You can read more about managing this transition at our fixed rate expiry page.

Fixed Rates and Offset Accounts Do Not Usually Mix

Most lenders do not allow you to link an offset account to a fixed rate loan. Some permit a redraw facility, but redraw works differently.

An offset account is a separate transaction account. The balance in that account reduces the loan balance on which interest is calculated, but the funds stay accessible. You can deposit your income, withdraw it for expenses, and the offset benefit adjusts daily without restriction.

A redraw facility sits inside the loan itself. When you make extra repayments above the minimum on a fixed loan that allows redraw, those extra payments reduce your loan balance. If the lender permits, you can apply to redraw those funds later. But redraw is not guaranteed to remain available, the lender controls access, and some lenders restrict or remove redraw during the fixed term or charge fees to access it. Redraw also does not give you the transactional flexibility of an offset because you are pulling money out of the loan rather than spending from a linked account.

If you rely on an offset account to manage irregular income or keep an emergency buffer while minimising interest, fixing the entire loan removes that option. A split loan structure keeps the offset linked to the variable portion and gives you a fixed rate on the rest.

Break Costs and Early Exit: What the Calculation Involves

If you repay a fixed rate loan in full before the term ends, whether by selling the property, refinancing, or paying out the loan from other funds, the lender may charge break costs.

Break costs compensate the lender for the difference between the fixed rate you agreed to and the rate the lender can now earn by reinvesting the funds they lent you. The calculation depends on wholesale funding rates at the time you break the loan compared to the rates when the loan was written, the amount you are repaying early, and how much time remains on the fixed term.

If wholesale rates have fallen since you fixed, break costs can be significant because the lender loses the margin between your higher fixed rate and the lower rate they can now earn. If wholesale rates have risen, break costs may be zero or minimal, and some lenders will waive the charge entirely. You will not know the exact amount until you request a payout figure from the lender, and that figure is only valid for a short window, often 10 to 14 days.

Buyers who know they may need to sell or refinance within the fixed term should consider a shorter fixed period, a split loan, or a variable loan with a rate lock option instead. There is no way to avoid break costs once the fixed term is locked in, other than waiting until the term ends or hoping that rate movements work in your favour when you exit.

Choosing a Fixed Term When You Are Using the 5% Deposit Scheme

First home buyers using the Australian Government 5% Deposit Scheme can access both fixed and variable rate loans through participating lenders, but not all lenders on the panel offer the same loan features.

Some participating lenders allow split loans under the scheme, others require you to pick either fixed or variable for the full amount. Some lenders restrict the maximum fixed term to three years, others allow up to five. Offset accounts, redraw, and the ability to make extra repayments during the fixed period also vary by lender.

If you are buying in Hampton under the scheme, the property price cap for metropolitan Melbourne is $950,000. A buyer purchasing near that cap with a 5% deposit will borrow a higher amount than a buyer purchasing further below the cap, and the loan features available on that larger borrowing matter more because the interest cost is higher and the flexibility to reduce it faster can save significant money over time.

Before you settle on a fixed term, confirm directly with the participating lender what features are available on the fixed product and whether a split structure is permitted. The scheme itself does not dictate those terms, the lender does, and they differ across the panel. You can explore low deposit options and how they apply to your situation through our home loans service.

How Fixed Terms Interact with Victorian Stamp Duty Concessions

The fixed term you choose does not affect your eligibility for the Victorian first home buyer stamp duty concession, but the timing of your loan approval and settlement can.

Victorian first home buyers receive a full stamp duty exemption on properties valued up to $600,000 and a sliding concession on properties valued from $600,001 to $750,000. You must move into the property within 12 months of settlement and live there as your principal place of residence for at least 12 continuous months.

If you fix your loan for one year and then sell before the 12-month occupancy requirement is met, you may be required to repay the concession. The fixed term and the occupancy requirement are separate conditions, but both run from settlement, and buyers sometimes miscalculate the overlap.

Hampton sits within the Bayside local government area, where established home values typically sit above the $600,000 threshold. Most buyers in the suburb will be working with the sliding concession band rather than the full exemption, and the duty saving can still reach several thousand dollars depending on purchase price. Make sure your fixed term does not create an incentive to exit the property before the 12-month occupancy requirement is satisfied, or you risk losing the concession and facing break costs at the same time.

Fixed Rates and Your Borrowing Capacity During Pre-Approval

Lenders assess your borrowing capacity using the higher of the actual loan rate or a serviceability buffer, typically the loan rate plus 3%.

If you apply for a fixed rate loan, the lender uses the fixed rate as the starting point for that calculation. If you apply for a variable rate loan, they use the variable rate. Because fixed rates and variable rates are not always identical, the rate type you choose at application can shift your maximum borrowing capacity by a few thousand dollars, or in some cases more, depending on your income and commitments.

Buyers applying for pre-approval sometimes ask whether they should lock in the rate type at that stage or leave it open. Pre-approval is conditional and does not bind you to a specific rate type, but some lenders issue pre-approval based on the rate structure you nominate at the time. If you apply on a fixed rate and then switch to variable at settlement, the lender may reassess your serviceability, particularly if variable rates have moved since pre-approval was granted.

If you are applying for pre-approval and you are unsure which rate type suits your situation, nominate the structure that gives you the borrowing capacity you need to purchase in your target price range, and confirm closer to settlement whether that structure still makes sense based on current rates and your circumstances at that time.

Call one of our team or book an appointment at a time that works for you. We work with first home buyers in Hampton and across Bayside Melbourne, and we will walk you through the fixed rate options available on your loan, how the terms compare, and what happens at each stage from application through to settlement and beyond.

Frequently Asked Questions