Understanding the Basics of Home Loan Structures

The way you structure a home loan can matter as much as the rate you choose. Structure decides how your repayments work, how much flexibility you have and what it costs to change course later.

This guide is for Victorians weighing up their options before they apply for a home loan. It focuses on the choices that shape your loan day to day, rather than on current rates, which change often and depend on your deposit and lender.

What Is the Difference Between a Variable Rate and a Fixed Rate Home Loan?

A variable rate moves up and down as your lender changes its rates, while a fixed rate stays the same for an agreed period. The right choice depends on whether you value certainty or flexibility more.

Variable rate loans often allow extra repayments and an offset account, which can help you pay the loan down sooner. The trade-off is that your repayments can rise if the lender lifts its rate. Fixed rate loans give you repayments you can plan around, but extra repayments are commonly capped, and leaving the loan early can trigger break costs. Features differ between lenders, so check the terms of any product before you commit.

How Does a Split Loan Work?

A split loan divides your loan amount into two parts, with one part fixed and the other variable. You choose the proportion, such as half and half.

The fixed part gives you some certainty. The variable part keeps room for extra repayments and for linking an offset account. The trade-off is that you carry both sets of limitations: the fixed portion may have caps and break costs, and the variable portion can still rise. A split suits borrowers who want some protection without giving up all flexibility.

Interest Only vs Principal and Interest Repayments

Interest only repayments cover just the interest charged, so the loan balance does not fall. Principal and interest repayments cover the interest plus part of the loan itself, so the balance reduces over time.

As an example, take a $600,000 loan at an illustrative rate of 6.75% p.a. Interest only repayments would be about $3,375 a month, calculated as $600,000 x 6.75% / 12. On a 30 year principal and interest loan at the same illustrative rate, repayments would be about $3,891 a month.

If that borrower took five years interest only and then switched to principal and interest, the loan would need to be repaid over the remaining 25 years. At the same illustrative rate, repayments would then rise to about $4,145 a month, because the full balance is still owing over a shorter term. Interest only can lower repayments for a period, but you build no equity through repayments during that time and you pay more interest overall. Lenders usually assess whether you could afford the higher principal and interest repayments over the remaining loan term, so interest only approval can be harder to get. Check the policy of the lender you are considering. Use a repayment calculator to test your own numbers.

Can an Offset Account Reduce the Interest You Pay?

A linked offset account can reduce interest because the balance in it is netted against your loan balance when interest is calculated. The more you keep in the account, the less interest is charged.

Consider a borrower with a $500,000 variable loan who keeps $50,000 in a linked offset account. Interest is calculated as if the loan were $450,000. At the illustrative rate of 6.75% p.a., that is roughly $3,375 a year less interest than on the full balance ($50,000 x 6.75%). The borrower still has access to that $50,000 for everyday needs or emergencies, and the savings continue for as long as the money stays there.

The trade-off is cost. Loans with offset accounts can carry higher rates or annual package fees, so it is worth comparing the total cost rather than the headline rate. An offset suits people who hold meaningful savings. If your balance is usually small, the benefit may not outweigh the fee.

Why Loan to Value Ratio and Lenders Mortgage Insurance Affect Your Structure

Your loan to value ratio (LVR) is your loan amount divided by the property value, and it influences which products and pricing you can access. A smaller deposit means a higher LVR.

When the LVR is high, lenders often charge Lenders Mortgage Insurance (LMI). This is a one-off cost that protects the lender, not you, and it can usually be added to the loan, which then increases the amount you pay interest on. A larger deposit can reduce or avoid LMI and may open up more discount options. If you are buying your first property, our first home buyers page explains the support that may be available to you.

Features Worth Checking Before You Choose

Beyond rate and repayment type, a few features can change how well a loan fits your life. Redraw lets you access extra repayments you have made, though some lenders limit or fee this. A portable loan may let you move the loan to a new property, subject to lender approval and any porting fees, which can avoid some refinancing costs, but not every product offers it.

Rate discounts also vary. A discount offered to you depends on your deposit, your circumstances and the lender, so compare the full terms rather than only the advertised rate. A broker can compare home loan products from the lenders on their panel and explain the cost and risk of each. You can read about how we work on our home loans page.

Matching Your Loan Structure to Your Goals

The right structure is the one that suits your goals and cash flow, and it can change as your life does. A borrower who wants repayment certainty may lean towards fixing part of the loan, while someone building savings may prefer a variable loan with an offset.

If your circumstances shift, a refinancing review can check whether your current structure still fits. If you are buying to invest, an investment loan may be structured differently, and tax outcomes depend on your situation, so speak with your accountant about any tax questions.

Call one of our team or book an appointment at a time that works for you. We will talk through your goals and help you find a loan structure that fits.

Frequently Asked Questions