What are Fixed Rate Loans and Extra Repayments?

A fixed interest rate locks in your repayment amount for a set period, typically one to five years.

That certainty appeals to many first home buyers who want predictable budgeting, particularly in an area like Double Bay where living costs run high. But fixed rate loans often come with restrictions on extra repayments, and those restrictions matter when you're trying to pay down your loan faster or manage a windfall like a bonus or gift.

How Fixed Rate Loans Work for First Home Buyers

A fixed rate loan holds your interest rate constant for the term you choose, regardless of whether the Reserve Bank moves official rates up or down. Your minimum repayment stays the same each month, which means you can budget with confidence. Most lenders allow you to fix for one, two, three, four or five years. Once the fixed period ends, your loan typically reverts to a variable interest rate unless you choose to fix again.

In our experience, many first home buyers in Double Bay are drawn to fixed rates when they've stretched their budget to secure a property close to the harbour, near Steyne Park, or within the village precinct. The appeal is straightforward: you know exactly what you'll pay, and you're protected if rates rise during the fixed period.

The trade-off is flexibility. While a variable rate loan typically allows unlimited extra repayments, most fixed rate loans cap additional payments at around $10,000 to $30,000 per year depending on the lender. Some lenders allow no extra repayments at all during the fixed term. If you exceed the cap, you may be charged a break fee, which can run into the thousands of dollars.

What Happens When You Make Extra Repayments on a Fixed Rate Loan

You can usually make extra repayments up to the lender's annual limit without penalty. Any amount beyond that limit may trigger a break cost, which is calculated based on the difference between your fixed rate and the wholesale rate the lender can achieve by reinvesting the funds you've repaid early. If rates have fallen since you fixed, the break cost can be substantial. If rates have risen, the break cost may be zero.

Consider a first home buyer who secures a one-bedroom apartment in Double Bay with a 5% deposit under the Australian Government scheme and fixes their rate for three years. They receive a $20,000 gift from family twelve months later and want to put it straight onto the loan. If their lender allows $20,000 in extra repayments per year, the full amount goes onto the loan without penalty and reduces the principal immediately. If the lender caps extra repayments at $10,000 per year, they can apply $10,000 to the loan and either hold the remaining $10,000 in an offset account linked to a separate variable split, invest it elsewhere, or pay it onto the loan and accept the break cost.

Should You Split Your Loan Between Fixed and Variable?

Many first home buyers split their borrowing between a fixed portion and a variable portion. You might fix 50% or 60% of your loan for rate certainty and leave the rest on a variable rate with an offset account and unlimited extra repayment capacity. That structure gives you predictable repayments on the fixed portion while preserving flexibility on the variable portion.

A split loan works particularly well if you expect irregular income, bonuses, or further financial help from family. The variable portion absorbs those payments without restriction, while the fixed portion anchors your budget. You can usually adjust the split when your fixed term expires, depending on your circumstances at the time.

If you're applying for pre-approval and you're not certain whether you'll receive additional funds over the next few years, a split structure is worth discussing. It costs nothing to set up with most lenders, and it avoids the situation where you're penalised for trying to get ahead on your loan.

Fixed Rate Loans and First Home Buyer Concessions in New South Wales

In New South Wales, first home buyers purchasing a property up to $800,000 pay no stamp duty, and a sliding concession applies between $800,000 and $1,000,000. Most properties in Double Bay sit above the $1,000,000 threshold, which means first home buyer stamp duty concessions don't apply unless you're purchasing a smaller apartment or looking just outside the immediate Double Bay postcode.

The choice between fixed and variable doesn't affect your eligibility for state concessions, but it does affect how you manage your loan once you've settled. If you've used a low deposit option and you're paying Lenders Mortgage Insurance, getting ahead on repayments can bring you to 80% loan-to-value ratio sooner, which may open up refinancing options down the track. A variable rate loan or a split loan gives you the flexibility to make that happen without penalty.

When a Fixed Rate Loan Makes Sense

A fixed rate loan suits buyers who value certainty over flexibility and who don't expect to make large lump sum repayments during the fixed period. If your income is stable, your savings are mostly committed to the deposit and settlement costs, and you want protection against rate rises, fixing can be the right choice.

It's less suitable if you're expecting a bonus, commission, inheritance, or further family contribution within the next few years. In that case, a variable rate loan or a split structure will give you somewhere to put those funds without triggering break costs. We regularly see first home buyers lock in a fixed rate because it feels safer, only to regret the lack of flexibility when they want to pay down the loan faster twelve months later.

Your decision should be based on your financial situation, not on rate predictions. No one can reliably forecast where rates will be in two or three years, and trying to time the market often leads to second-guessing. Focus on what works for your income, your savings pattern, and your tolerance for repayment variability.

How to Structure Extra Repayments Without Breaking Your Fixed Rate

If you've already fixed your rate and you want to make extra repayments, check your loan contract for the annual limit. Most lenders publish this in the terms and conditions, and your broker can confirm the exact figure. Once you know the cap, you can plan your repayments to stay within it.

If you have funds beyond the cap, consider opening an offset account linked to a variable split if your loan structure allows it, or hold the surplus in a high-interest savings account until your fixed term ends. Paying a break cost to get ahead on your loan rarely makes financial sense unless you're exiting the loan entirely, such as when selling the property.

Another option is to make the maximum allowable extra repayment each year during the fixed term, then apply any remaining funds as a lump sum once the loan reverts to variable. That approach avoids penalties and still accelerates your repayment timeline, just on a delayed schedule.

Call one of our team or book an appointment at a time that works for you. We'll walk through your loan structure, your repayment options, and how to set up a split if that's the right fit for your situation.

Frequently Asked Questions