Mortgage Options Explained — Fixed, Variable, Split, Offset and More
A plain-English guide to the main Australian home loan options — fixed, variable, split, interest-only, offset, redraw, and package loans — with pros, cons, and who each suits.
General information and estimates only — not financial, tax, or legal advice. Always verify with a licensed adviser or the ATO.
Step 1.Start with the core choice: fixed or variable?
Every Australian home loan starts with one decision — fixed rate or variable rate. A variable rate moves up and down with the market, typically tracking changes in the RBA cash rate and your lender's funding costs. A fixed rate locks your interest rate for a set period (usually 1 to 5 years), after which the loan reverts to the lender's variable rate. Neither is better in the abstract — the right choice depends on your cash flow needs, your view on where rates are heading, and how much flexibility you need with features like extra repayments and offset accounts.
Step 2.Variable rate home loans
A variable rate loan moves with the market. When the RBA cuts the cash rate, your repayments usually fall; when rates rise, they climb. The upside: variable loans come with the richest feature set — unlimited extra repayments, full offset accounts, redraw, and easy refinancing with no break costs. The downside: you wear the risk of rate rises, and in a rising market, your repayments can jump quickly. Variable loans suit borrowers who want flexibility, plan to make extra repayments, want to use an offset account, or expect rates to fall or stay flat. Most Australian mortgages are variable.
Step 3.Fixed rate home loans
A fixed rate locks your interest rate for a set term, typically 1, 2, 3, or 5 years. The big advantage is certainty — your repayment won't change for the fixed period regardless of what the RBA does, which is valuable for budgeting. The trade-offs are real: extra repayments are usually capped (often at $10,000 per year), offset accounts are either unavailable or only partially effective, and breaking a fixed loan early can trigger substantial 'break costs' if rates have fallen since you fixed. Fixed loans suit borrowers who value certainty, have a tight budget, or believe rates are likely to rise sharply during the fixed period.
Step 4.Split loans — the middle ground
A split loan divides your mortgage into two parts: one fixed, one variable. For example, on a $600,000 loan you might fix $300,000 for 3 years and leave $300,000 variable. This gives you partial certainty on repayments while keeping the flexibility and offset benefits of the variable portion. You can make unlimited extra repayments on the variable side and run an offset account against it, while the fixed side protects you from rate rises on half the loan. Splits suit borrowers who want some certainty but also want to use an offset or pay down the loan faster.
Step 5.Principal and Interest vs Interest Only
On a Principal and Interest (P&I) loan, every repayment pays down both the interest and some of the loan balance, so the debt shrinks over time. On an Interest Only (IO) loan, you pay only the interest for a set period (usually 1 to 5 years), so repayments are lower but the loan balance stays the same. Owner-occupiers almost always use P&I because you're building equity in your home. IO is mostly used by property investors, because interest on an investment loan is tax-deductible and lower repayments can improve cash flow. APRA has tightened IO lending over recent years, and IO loans generally carry a higher interest rate than P&I. Once the IO period ends, repayments jump significantly as the loan reverts to P&I over the remaining term.
Step 6.Offset accounts
An offset account is a transaction account linked to your home loan. Money sitting in the offset 'offsets' your loan balance for interest calculation purposes — so if you owe $500,000 and have $50,000 in the offset, you only pay interest on $450,000. Every dollar in the offset reduces your interest charge without locking the money away, so you keep full access to it. Offsets are powerful on variable loans but often limited or unavailable on fixed loans. They're particularly effective for borrowers who hold a cash buffer, receive income into the account, and use it as their main transaction account. Use our Offset Calculator to see how much you could save.
Step 7.Redraw facilities
A redraw facility lets you pull back extra repayments you've made on your home loan. If you're on a variable P&I loan and pay more than the minimum, that extra sits against your loan and reduces interest. Redraw lets you withdraw that surplus later if you need it. Redraw is similar to an offset in effect but works differently for tax — interest savings from redraw are not treated the same as offset interest savings for investors, and accessing redraw on a loan that has become an investment property can create a tax mess. Redraw is simple, free on most loans, and effective for owner-occupiers. Offset is usually better for investors and anyone who wants their savings to remain clearly separate from their loan.
Step 8.Package loans vs basic loans
Lenders often sell home loans in two tiers. A basic or 'no-frills' loan has a lower rate and lower fees but a stripped-down feature set — usually no offset, limited extras. A package loan (or 'professional package') bundles a home loan with an offset account, credit card, and sometimes insurance or transaction accounts, for an annual fee (typically $300–$400). The package usually comes with a rate discount off the standard variable rate. Whether the package is worth it depends on whether you'll use the offset and other features — if you will, the rate discount plus offset savings usually beat the package fee. If you won't, a basic loan is cheaper.
Step 9.How to choose the right mortgage option for you
Work through these questions in order. First, how much certainty do you need on repayments? If your budget is tight and a rate rise would hurt, lean toward fixed or split. Second, will you make extra repayments or hold savings in an offset? If yes, you need a variable loan (or the variable half of a split). Third, owner-occupier or investor? Investors should think carefully about P&I vs IO and the tax treatment of offset vs redraw. Fourth, what's the total cost? Compare the comparison rate (which includes fees) not just the headline rate, and model the full life of the loan. Use our Mortgage Calculator and Offset Calculator together to see how different options would play out for your situation.
Useful Tools
- Mortgage Calculator
- Offset Account Calculator
- Borrowing Power Calculator
- Extra Repayment Calculator
- RBA Cash Rate Tracker
- LMI Calculator
Resources
- Moneysmart — Home loans (moneysmart.gov.au/home-loans)
- APRA — Residential mortgage lending standards (apra.gov.au)
- RBA — Cash rate target (rba.gov.au/statistics/cash-rate-target.html)
- ATO — Rental property loan interest deductibility (ato.gov.au)