A fixed, variable or split loan each suit a different type of first home buyer, and the right pick depends on how you want to handle repayment certainty and flexibility.
If you are an orthodontist, your income may be uneven in the early years. Income can vary in the early years for some professionals, for example while a patient list builds. That makes the structure of your first loan as important as the lender you choose. This article compares the three options so you can decide which fits your situation.
What Is the Difference Between Fixed, Variable and Split Home Loans?
A fixed loan locks your interest rate for a set period, a variable loan has a rate your lender can change, and a split loan divides your borrowing between the two.
With a fixed rate, your repayments stay the same during the fixed term. The trade-off is that extra repayments are often capped, and leaving the loan early can trigger break costs. With a variable rate, repayments can rise or fall when your lender changes the rate. The upside is that variable loans commonly allow unlimited extra repayments and may offer an offset account or redraw facility, depending on the lender.
A split loan lets you choose the proportion for each part, such as half fixed and half variable. Both halves run under the one loan, but each part carries its own rules.
How Do Repayments Compare on a Fixed and Variable Loan?
Repayments on a fixed loan stay steady for the fixed term, while variable repayments move with the rate your lender sets.
As an illustrative example, take a $700,000 loan over 30 years at 6.75% p.a., principal and interest. The monthly repayment is about $4,540. If the rate on a variable loan rose by 0.5 percentage points to 7.25%, the same loan would cost about $4,775 a month, roughly $235 more. A fixed loan at 6.75% would hold at $4,540 for the fixed term. These figures are for illustration only, and your actual rate depends on your deposit size and lender. A borrowing capacity check will show what a loan of that size looks like on your income.
Why Do Variable Loans Suit Orthodontists With Changing Income?
A variable loan suits buyers who expect surplus cash at times, because it lets you pay extra without penalty and keep a buffer through an offset account or redraw.
Consider an orthodontist who has just finished specialist training and joined a practice as an associate. Income is lower in the first months while the patient list builds. They choose a variable loan with an offset account. In busy months they park spare cash in the offset, which reduces the interest charged on the loan. In a slower month, that cash is still available to cover living costs. The outcome is that they keep their repayments manageable without locking into a structure that limits extra payments.
The trade-off is rate risk. If the lender raises its rate, your repayments go up, and you need room in your budget to absorb that. Offset accounts can also carry a package fee, so check the cost against the interest you expect to save.
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When Does a Fixed Rate Make Sense for a First Home Buyer?
A fixed rate makes sense when you need certainty about repayments for a set period, for example while you are also funding a practice purchase or fit-out.
The main costs are reduced flexibility and possible break costs if you sell or refinance before the term ends. Many lenders also limit how much extra you can repay each year during the fixed period. When the fixed term ends, the loan moves to the lender's variable rate unless you arrange another option, so it helps to plan ahead. Our page on fixed rate expiry explains what to prepare for.
How Does a Split Loan Work in Practice?
A split loan lets you fix part of the loan for certainty and leave the rest variable for flexibility, and you choose the proportions.
Take the same $700,000 loan. You might fix $350,000 and keep $350,000 variable with an offset account attached. If variable rates rise, only half your loan is exposed to the increase. If you receive a bonus or sell a car, you can put the cash into the variable part without hitting a fixed-rate cap. The outcome is a middle path, though you give up some of the benefit if rates fall, because the fixed half will not move.
Splits add some admin. Each part has its own balance and terms, and any offset account usually only works against the variable part. Ask your broker how the lender treats the two parts before you commit.
Which Structure Works With Low Deposit Options?
Loan structure options under low deposit schemes depend on the participating lender, so confirm with them what is available.
The Australian Government 5% Deposit Scheme lets eligible first home buyers purchase with a 5% deposit without paying lenders mortgage insurance. Under the 5% Deposit Scheme the loan must be an owner-occupier principal and interest loan. Ask the participating lender whether fixed, variable, split or offset options are available. Price caps and eligibility rules apply, and you apply only through a participating lender. See our page on the 5% Deposit Scheme for Dentists for more detail, and our Help to Buy scheme page if you are weighing a shared equity option instead.
What Should You Sort Out Before You Choose a Structure?
Get your pre-approval and budget in order first, because they show how much room you have to handle a rate rise and which structure you can realistically hold.
A lender will assess your income, expenses and debts when it looks at your application. If you are early in your career, your broker can explain how lenders treat specialist income. Our guide to getting loan pre-approval covers the process, and our page on home loans for orthodontists covers how we work with your profession.
A useful test is to ask what happens to your budget if repayments rose by a few hundred dollars a month. If the answer is that you would be comfortable, a variable or split structure with an offset account may suit you. If it would be tight, more of the loan in fixed may give you a calmer footing.
Call one of our team or book an appointment at a time that works for you, and we will compare structures using your own numbers.
Frequently Asked Questions
What is a split home loan?
A split loan divides your borrowing into a fixed part and a variable part. You choose the proportions, and each part follows its own rules.
Can I make extra repayments on a fixed loan?
Often only up to a limit, and that limit varies by lender. Variable loans commonly allow unlimited extra repayments.
Does the 5% Deposit Scheme limit my loan structure?
The loan must be an owner-occupier principal and interest loan from a participating lender. Which fixed, variable, split or offset options are available depends on the lender, so confirm with them.
How much more would repayments cost if the rate rose?
As an illustration, a $700,000 loan over 30 years at 6.75% p.a. is about $4,540 a month. At 7.25% it would be about $4,775 a month.
