Home Loan Types Explained for First Home Buyers

Choosing the right home loan is just as important as choosing the right property. As a first home buyer, you’ll likely come across terms like fixed mortgage, variable mortgage, split loan, and offset account. While these products may sound similar, they work differently and can significantly affect your repayments, flexibility, and the total interest you pay over the life of your loan.

Many first home buyers focus on finding the lowest advertised interest rate. However, the cheapest loan isn’t always the best choice. Loan features, repayment flexibility, redraw facilities, offset accounts, and the ability to make extra repayments can all influence how much your mortgage ultimately costs.

Australian lenders offer a wide range of home loan products designed to suit different financial goals and risk preferences. Some borrowers value the certainty of fixed repayments, while others prefer the flexibility of a variable loan. Many choose a combination of both through a split mortgage.

This guide explains the most common home loan types available in Australia, their advantages and disadvantages, and how to determine which option best suits your financial circumstances.

Why Choosing the Right Home Loan Matters 

A mortgage is typically the largest financial commitment you’ll ever make. Even a small difference in interest rates or loan features can save—or cost—you thousands of dollars over the life of the loan. 

When comparing home loans, it’s important to consider more than the interest rate alone. Ask yourself: 

• Do I want repayment certainty? 

• Will I make extra repayments? 

• Do I need flexibility if my circumstances change? 

• Would an offset account help reduce interest? 

• Am I comfortable with interest rate fluctuations? 

If you’re just starting your journey, our first home buyer guide can help you understand each step of the buying process. 

What Is a Fixed Mortgage? 

A fixed mortgage locks in your interest rate for an agreed period, usually between one and five years. During this time, your repayments generally remain the same, regardless of changes in the official cash rate or market interest rates.

For example, if you fix your loan at 5.60% for three years, your interest rate and scheduled repayments generally won’t change during that fixed period. 

Advantages of a Fixed Mortgage 

A fixed mortgage provides certainty and predictability, making it easier to budget. 

Benefits include: 

• Consistent monthly repayments 

• Protection from interest rate increases during the fixed term 

• Easier household budgeting 

• Greater financial certainty for first home buyers 

If interest rates rise while your loan is fixed, you’ll continue paying the lower agreed rate until the fixed period expires. 

Disadvantages of a Fixed Mortgage 

While fixed loans provide stability, they often offer less flexibility. 

Potential drawbacks include: 

• Limited or no additional repayments 

• Restrictions on redraw facilities 

• Break costs if you refinance or repay the loan early 

• Limited access to an offset account with some lenders 

If market interest rates fall significantly, borrowers on a fixed mortgage generally won’t benefit until their fixed period ends. 

What Is a Variable Mortgage? 

A variable mortgage has an interest rate that can increase or decrease over time. 

Your lender may adjust the rate in response to changes in funding costs or movements in the Reserve Bank of Australia’s cash rate. 

As your interest rate changes, your repayments may also change. 

Advantages of a Variable Mortgage 

Variable loans generally offer greater flexibility. 

Common features include: 

• Unlimited additional repayments 

• Redraw facilities 

• Ability to refinance more easily 

• Full offset account availability with many lenders 

• Potential to benefit if interest rates fall

Many borrowers appreciate the freedom to reduce their loan balance faster through additional repayments. 

Disadvantages of a Variable Mortgage 

The biggest disadvantage is uncertainty. 

If interest rates rise: 

• Monthly repayments increase 

• Household budgets may become tighter 

• Borrowing costs rise over time 

Borrowers need sufficient financial flexibility to manage changing repayments. 

Fixed Mortgage vs Variable Mortgage 

Choosing between a fixed mortgage and a variable mortgage depends on your financial goals and attitude towards risk. 

Feature	Fixed Mortgage	Variable Mortgage
Repayment certainty	High	Varies
Interest rate changes	Locked during fixed period	Can increase or decrease
Extra repayments	Usually limited	Often unlimited
Offset account	Sometimes limited	Commonly available
Redraw facility	Limited	Usually available
Early exit flexibility	Lower	Higher

 

There is no universally “best” option. The right choice depends on your financial situation and personal preferences. 

What Is a Split Home Loan? 

A split loan combines both fixed and variable interest rates within the same mortgage. 

For example: 

• 50% fixed 

• 50% variable 

This allows borrowers to enjoy both repayment certainty and flexibility. 

Benefits 

• Protection against interest rate increases on part of the loan 

• Access to offset and redraw features on the variable portion 

• Greater flexibility than a fully fixed mortgage 

Split loans have become increasingly popular among Australian borrowers seeking balance rather than choosing one option exclusively. 

Understanding an Offset Account

An offset account is one of the most valuable features available on many Australian home loans.

It works like an everyday transaction account but reduces the interest charged on your mortgage.

Instead of earning interest on your savings, the balance in your offset account is deducted from your home loan balance when interest is calculated.

Example 

Home Loan: 

$600,000 

Offset Account Balance: 

$40,000 

Interest is charged as though your loan balance is: 

$560,000 

Although your mortgage balance remains $600,000, you’re only charged interest on $560,000 while the offset funds remain in the account. 

Benefits of an Offset Account 

An offset account can provide significant long-term savings. 

Advantages include: 

• Reduces interest payable 

• Helps repay your mortgage faster 

• Maintains access to your savings 

• May reduce the total loan term 

• Flexible for everyday banking 

Unlike making additional repayments directly into your mortgage, money in an offset account remains readily accessible if needed. 

Offset Account vs Redraw Facility 

These features are sometimes confused, but they work differently. 

Offset Account 

• Separate bank account 

• Reduces interest charged 

• Funds remain immediately accessible 

• Operates like a normal transaction account 

Redraw Facility 

• Extra repayments are made directly into your loan 

• Allows access to surplus repayments 

• Availability depends on lender policies 

• May have minimum redraw amounts 

Both can reduce interest costs, but an offset account generally offers greater day-to-day flexibility. 

Which Home Loan Is Best for First Home Buyers? 

There isn’t a one-size-fits-all answer. 

The ideal mortgage depends on your financial circumstances, career stability, future plans and risk tolerance. 

A fixed mortgage may suit buyers who: 

• Prefer predictable repayments 

• Have a strict household budget 

• Want protection against future rate rises 

A variable mortgage may suit buyers who: 

• Plan to make extra repayments 

• Want greater flexibility 

• Expect interest rates to fall 

• Want access to an offset account 

A split loan may suit borrowers seeking a balance between certainty and flexibility. 

Features Worth Comparing 

Interest rate is only one part of the overall loan. 

Compare: 

• Comparison rate 

• Annual fees 

• Offset account availability 

• Redraw facility 

• Extra repayment limits 

• Loan portability 

• Online banking features 

• Customer service 

• Refinancing flexibility 

Using our borrowing power calculator guide can also help you estimate how much you may be able to borrow before comparing lenders. 

Common Mistakes First Home Buyers Make 

Many first home buyers focus solely on securing loan approval without comparing mortgage features. 

Common mistakes include: 

• Choosing a loan based only on interest rate 

• Ignoring comparison rates 

• Not considering an offset account 

• Fixing the entire loan without understanding restrictions 

• Overlooking annual fees 

• Failing to compare multiple lenders 

• Not reviewing the loan after the fixed period expires 

Taking time to compare loan products before signing can result in substantial long-term savings.