Do you know variable rate loans and extra repayments?

Variable Interest Rates Give You Room to Move

A variable interest rate changes with market conditions, which means your repayment can go up or down. Most variable rate loans let you make extra repayments without penalty, which can cut years off your loan term and reduce the total interest you pay over time.

Consider a buyer in Midland who settles on a townhouse using the Australian Government 5% Deposit Scheme. They borrow at the current variable rate and commit to paying an extra $200 each fortnight beyond the minimum repayment. Over the first three years, that additional $10,400 per year reduces the principal faster than scheduled repayments alone, which means less interest compounds over the remaining loan term. The buyer also retains the option to pause those extra payments if circumstances change, which is not typically possible with a fixed rate structure.

Variable rate loans suit buyers who expect their income to increase or who want the option to pay down debt faster when they can afford it. The flexibility to adjust repayment behaviour without penalty is one of the main reasons first home buyers in Midland choose this structure, particularly when buying close to the suburb's median where every dollar of extra repayment has a measurable impact.

How Offset Accounts and Redraw Facilities Work

An offset account is a transaction account linked to your home loan. The balance in the offset account reduces the principal on which interest is calculated, without actually making a repayment. A redraw facility lets you withdraw extra repayments you have already made, subject to lender conditions.

In a scenario where a buyer has saved $8,000 beyond their deposit and settlement costs, they can place that money in an offset account rather than leaving it in a standard savings account. If the loan balance is $400,000 and the offset account holds $8,000, interest is calculated on $392,000. The buyer retains access to the $8,000 at any time, which is useful if they need funds for furniture, repairs, or unexpected costs after settlement.

Redraw works differently. Once you make an extra repayment, that money reduces your loan balance immediately. You can usually redraw that amount later, but some lenders impose minimum redraw amounts or charge a fee for each redraw transaction. Offset accounts generally offer more flexibility, but not all lenders include them on every variable rate product. When comparing home loan options, confirm whether an offset account is included or available as an optional feature.

First Home Buyer Eligibility and Low Deposit Options in Western Australia

First home buyers in Western Australia can access the Australian Government 5% Deposit Scheme, which allows you to purchase with a 5% deposit and no lenders mortgage insurance. The property price cap in Perth and applicable metropolitan postcodes is $850,000. Midland falls within that metropolitan classification.

You can also access the Western Australian First Home Owner Grant of $10,000 if you are purchasing or building a new home valued below the applicable cap. For homes south of the 26th parallel, which includes Midland, the grant cap is $800,000. The grant is not available for established homes.

Stamp duty relief is available under the First Home Owner Rate of duty. No duty is payable on homes valued up to $600,000. A concessional rate applies on homes valued between $600,001 and $800,000. These thresholds apply statewide from May this year, so the same duty concession applies whether you are buying in Midland, Rockingham, or further north.

You must occupy the home as your principal place of residence for at least six months within 12 months of settlement to qualify for the grant and duty concession. If you are using the 5% Deposit Scheme, your first home loan application must be submitted through a participating lender. Not all lenders participate, and not all participating lenders offer the same loan features or variable rate products.

Why Extra Repayments Matter More Than Rate Alone

The ability to make extra repayments without penalty can have a larger impact on your total interest cost than a slightly lower rate on a fixed loan that does not allow extra payments.

As an example, a buyer borrows at a variable rate with no restriction on extra repayments. They pay an additional $150 per fortnight from the first repayment. That equates to $3,900 per year. Because each extra repayment reduces the principal immediately, the buyer pays less interest on every subsequent repayment. The compounding effect over five or ten years is substantial, particularly in the early years of the loan when the principal balance is highest.

If the same buyer had chosen a fixed rate loan with no extra repayment allowance, they would have paid interest on the full principal for the entire fixed period, even if they had surplus income. Some fixed rate products allow limited extra repayments, often capped at $10,000 or $20,000 per year, but those caps can restrict buyers who receive a bonus, inheritance, or other lump sum.

When you apply for a home loan, ask whether the variable rate product allows unlimited extra repayments and whether any conditions apply. Some lenders require that extra repayments be made in minimum amounts or restrict access to redrawn funds for a period after the extra payment is made. Those conditions can reduce the practical value of the feature.

What Happens When Rates Change

Variable interest rates move in response to changes in the official cash rate and lender funding costs. If the rate on your loan increases, your minimum repayment increases unless you have been making extra repayments that create a buffer.

A buyer who has been paying $200 extra each fortnight for two years will have built up equity faster than the scheduled loan term requires. If the rate increases and the minimum repayment rises, the buyer can reduce or pause the extra repayments and still meet the higher minimum without financial stress. That buffer is not available to a buyer who has only ever paid the minimum amount.

If the rate decreases, your minimum repayment will fall. You can choose to maintain the same total repayment you were making before the decrease, which means the entire rate reduction becomes an extra repayment. This accelerates the principal reduction without requiring any additional income.

Midland buyers who work in industries with variable income, such as retail or hospitality, often prefer variable rate loans because they can adjust repayment behaviour to match income fluctuations. A buyer working in a role with seasonal hours can make larger extra repayments during busy periods and revert to minimum repayments during quieter months, which is not possible under a fixed rate structure.

Combining Variable and Fixed Rates in a Split Loan

Some buyers choose a split loan, where part of the loan is fixed and part is variable. The fixed portion provides repayment certainty, and the variable portion allows extra repayments and access to an offset account.

In a split structure, you might fix 50% of the loan for three years and leave the other 50% on a variable rate. You make extra repayments only on the variable portion, which reduces the principal on that portion faster. The fixed portion remains unchanged until the fixed term ends, at which point you can choose to refix, switch to variable, or leave both portions on variable.

Split loans add complexity to your home loan application, and not all lenders offer split structures under the 5% Deposit Scheme. If you are considering a split, confirm with your lender or broker whether the split is available on your chosen product and whether any additional fees apply for managing two loan accounts.

How to Structure Your First Home Loan Budget

Your first home buyer budget should include the deposit, stamp duty, settlement costs, and an ongoing repayment buffer. Settlement costs typically include lender fees, valuation fees, conveyancing fees, and any upfront insurance premiums.

If you are using the 5% Deposit Scheme, you do not pay lenders mortgage insurance. If you are not using the scheme and are borrowing with a deposit below 20%, LMI will apply and will be added to your loan balance or paid upfront. LMI can add several thousand dollars to your total borrowing, depending on the size of your deposit and the lender's LMI pricing.

When calculating how much you can afford to repay each fortnight or month, include a buffer for rate increases, property maintenance, and council rates. Midland is serviced by the City of Swan, and rates vary depending on the property's gross rental value. Strata fees apply if you are purchasing a townhouse or apartment, and those fees are payable regardless of your loan repayment.

If you expect your income to increase within the first few years of owning the property, factor that increase into your repayment plan rather than your borrowing capacity. Lenders assess your capacity based on your current income and existing commitments, not on future income potential.

When to Use Redraw and When to Use Savings

Redraw is useful when you want to reduce your loan balance but retain access to those funds in case of emergency. Savings in an offset account achieve a similar result without locking the money into the loan structure.

If your lender charges a fee for each redraw or imposes a minimum redraw amount, it is generally more practical to keep a buffer in an offset account rather than making extra repayments you may need to redraw later. If your variable rate product does not include an offset account, consider whether the lack of that feature is offset by a lower rate or other benefits.

Some buyers prefer to make extra repayments directly to the loan and avoid holding surplus cash in any account. That approach works if you have a separate emergency fund or access to other liquid assets. If you do not have an emergency fund, holding at least three months of repayments in an offset account or standard savings account provides a cushion without increasing your loan balance.

Choosing the Right Lender for Your Variable Rate Loan

Not all lenders offer the same features on variable rate products. Some include offset accounts at no additional cost, while others charge a package fee or restrict offset access to higher loan balances. Some lenders allow unlimited extra repayments with no minimum, while others impose conditions on redraw or limit the number of free redraws per year.

When comparing lenders, confirm the following: whether an offset account is included, whether extra repayments are unrestricted, whether redraw is available and free, and whether the lender participates in the 5% Deposit Scheme if you are using that program. If you are applying under the scheme, your choice of lender is limited to the participating panel, so check the list on the Housing Australia website before you start comparing products.

If you are not using the scheme and are considering a 10% deposit with LMI, you have access to a wider range of lenders. Some lenders offer interest rate discounts for borrowers who maintain an offset balance above a certain threshold or who link their loan to a package that includes transaction accounts and credit cards. Those discounts can reduce your effective rate by 0.10% to 0.30%, which adds up over a 30-year loan term.

Call one of our team or book an appointment at a time that works for you. We work with first home buyers in Midland and across Perth, and we can help you compare variable rate products, confirm your eligibility for state and federal schemes, and structure a loan that gives you the flexibility to pay down your debt faster when your income allows.

Frequently Asked Questions