The Pros and Cons of Fixed Rates and Extra Repayments

A fixed rate gives you repayment certainty, but it can limit how quickly you pay your loan down. At Dubbo Mortgage Brokers, we help borrowers across Dubbo and the Central West. We want you to see both sides before you lock anything in.

What Are the Pros and Cons of a Fixed Rate Home Loan?

A fixed rate home loan holds your interest rate steady for a set period, so your repayment does not change during that time. The trade-off is that you give up some flexibility, and the limits vary between lenders.

The main advantages are:

• Your repayment stays the same, which makes budgeting easier if you are on a tight household income.
• You are protected if variable rates rise during your fixed term.

The main drawbacks are:

• You will not benefit if variable rates fall.
• Many lenders cap the extra repayments you can make during the fixed period.
• Break costs may apply if you repay or refinance the loan early. These can be significant, so ask your lender how they would be worked out.

A fixed rate can suit you if certainty matters more to you than flexibility. If you expect to receive a lump sum, or plan to sell or refinance soon, it may suit you less.

Can You Make Extra Repayments on a Fixed Rate Loan?

Often you can, but only up to a limit set by your lender. Many lenders cap extra repayments on fixed loans each year, and going over the cap can trigger fees. Check the limit in your loan terms before you rely on it.

Extra repayments reduce your loan balance faster, which cuts the interest charged on what is left. A variable rate loan usually gives you more room to do this, and some lenders let you pair it with an offset account.

Extra Repayments in Action: A Worked Example

Extra repayments on a fixed loan work well when they sit under your lender's cap. In this illustrative example, a small regular top-up lowers the balance by roughly $11,900 over three years.

Consider a Dubbo buyer with a $500,000 loan amount on a 30-year principal and interest loan. We will use an illustrative rate of 6.75% p.a., not a current offer. Calculating home loan repayments at that rate gives a minimum of about $3,243 a month.

The buyer wants to add $300 a month. Their lender caps extra repayments on fixed loans at $10,000 a year, so $3,600 a year fits comfortably under the limit.

After three years of minimum repayments only, the balance would be about $482,900. With the extra $300 a month, it would be about $470,900. The extra $10,800 the buyer paid in has cut the balance by about $11,900, because less interest is charged along the way.

The same buyer then gets a $30,000 work bonus. Putting all of it into the loan would break the $10,000 cap and could trigger fees. They would need to ask their lender first, or hold the money elsewhere. The cap that suited their regular top-ups worked against them here.

Is a Split Loan a Good Middle Path?

A split loan divides your loan into a fixed portion and a variable portion. That gives you some certainty and some flexibility. The cost is that you manage two balances, and the fixed portion still carries its own limits.

In the example above, the buyer could fix part of the loan and leave the rest variable. Bonuses and extra repayments could then go to the variable side, where caps are usually less restrictive and an offset account may be available depending on the lender. The fixed portion would keep part of the repayment steady.

The right split depends on your budget and how likely it is that you will have spare cash. A broker can compare how different lenders treat extra repayments, offsets and break costs on each portion, so you are not reading through every product disclosure yourself.

What Happens When Your Fixed Rate Ends?

When your fixed term ends, your loan usually moves to the lender's variable rate unless you choose another option. That rate can be higher or lower than what you were paying. The details are worth checking a few months before your expiry date.

This is a good time to review your loan. You might re-fix, move to a variable rate, split the loan or refinance to another lender. Our page on what happens when your fixed rate expires explains the choices in more detail. If you would like a second opinion on your current loan, our home loan health check looks at whether your rate and features still suit you. If another lender looks like a better fit, we can talk you through refinancing your home loan. Break costs are worth checking before you switch away from a fixed loan early.

Which Option Suits Central West Borrowers?

The right choice depends on your income, your plans and how much spare cash you expect to have. Fixed rates tend to suit people who value certainty. Variable rates and split loans tend to suit people who want room to pay extra.

Before you decide, it helps to know how much you can borrow. Our borrowing capacity calculator gives you a starting point. We can then compare loan options from the lenders on our panel and explain the cost and the trade-off of each.

Call one of our team or book an appointment at a time that works for you. We will go through your numbers with you and explain how each lender treats extra repayments.

Frequently Asked Questions