Fixed Rate Loans and Offset Accounts: What to Weigh Up

A fixed rate locks in your repayment for a set time, while an offset account reduces the interest you pay by sitting against your loan balance. You can use one, the other, or a mix, and each choice comes with a trade-off.

This article is for NDIA employees weighing up a home loan and deciding how much certainty and how much flexibility they want. It does not remove the need to check the rules of each loan.

How Does a Fixed Rate Home Loan Work?

A fixed rate home loan holds your interest rate at one level for an agreed period, so your repayment stays the same until the fixed term ends. When the term ends, the loan usually moves to a variable rate unless you fix again or refinance.

The main benefit is certainty. If your household budget is tight, knowing the exact repayment can make planning easier. The main trade-off is flexibility. Many lenders limit extra repayments during the fixed term, and some do not offer a full offset account on a fixed loan. If you pay off the loan or switch lenders early, you may face break costs, which depend on the lender and market conditions when you exit.

If your fixed term is close to ending, our fixed rate expiry page explains your options before the rate rolls over.

How Does an Offset Account Work?

An offset account is a transaction account linked to your home loan. The balance in it is subtracted from your loan balance when interest is calculated, so you pay interest only on the difference.

As an illustration, take a loan of $600,000 at 6.75% p.a. with $40,000 sitting in the offset. Interest is worked out on $560,000. That is about $2,700 a year in interest on the $40,000 you are not charged for, calculated at the illustrative rate of 6.75% p.a. The rate is an example only, and your actual rate will depend on your lender and your deposit size.

The benefit is that your savings stay available. You can still use the money for emergencies or a car repair, unlike extra repayments that may be hard to redraw. The trade-off is that loans with an offset can carry a higher rate or an annual package fee. The saving only beats that cost if you keep a meaningful balance in the account most of the time.

Can You Have a Fixed Rate and an Offset Account Together?

Often you cannot have a full offset on a fixed loan, but a split loan can give you both. A split loan divides your borrowing into a fixed portion and a variable portion, and the offset is usually attached to the variable portion.

Features differ between lenders, so check the product disclosure before you apply. Some lenders offer a partial offset on fixed loans, and some offer none at all.

A Split Loan Example for a Dual-Income Couple

A split loan lets you fix part of your borrowing for certainty while keeping the rest variable with an offset for flexibility. Here is how that could look in practice.

Consider a couple who both work at the NDIA and are borrowing $700,000 for an owner occupied home loan. They want repayment certainty, but they also expect a bonus and some savings to come in over the next year. They split the loan into $400,000 fixed and $300,000 variable with an offset attached to the variable part.

At the illustrative rate of 6.75% p.a. on both portions, over 30 years of principal and interest, the fixed portion repayment is about $2,594 a month. The variable portion is about $1,946 a month. Together that is about $4,540 a month. The rate on each portion would differ in real life, so the figures are only a guide.

They then put $30,000 of savings into the offset. This reduces the balance the variable interest is charged on from $300,000 to $270,000, so they pay less interest, while the $30,000 stays accessible. Their fixed portion is protected from rate changes. The trade-off is that the fixed portion has limited extra repayment options, and the offset only helps while money is sitting in it.

You can test numbers like these with a repayment calculator, or ask us to run a few versions against different lenders.

What Should You Compare Before Choosing?

Compare the rate, the fees, the extra repayment limits and the offset rules together, not just the headline rate. A low rate with a high annual fee can cost more than a slightly higher rate with no fee.

It also helps to ask whether the lender offers a rate discount for public servants or for larger loans. Our page on getting a lower interest rate covers how discounts can be requested. Whichever way you split the loan, the amount you can borrow still depends on your income, debts and living costs, so a borrowing capacity check is a sensible early step.

If you are buying, getting loan pre-approval lets you set your budget before you make an offer. If you already have a loan, a loan health check can show whether a fixed rate, split or offset would suit you better. We also have a page specifically for NDIA home loans.

Which Option Suits Your Situation?

Fixed suits people who value certainty, an offset suits people who hold savings, and a split suits people who want a bit of both. None is right for everyone.

If you rarely hold much cash, the offset's value will be small. If you plan to sell or refinance within the fixed term, break costs could outweigh the benefit of locking in. Think about how long you plan to stay and how much cash you will realistically keep in the account.

Call one of our team or book an appointment at a time that works for you. We can compare home loan options from banks and lenders across Australia and help you choose a structure that fits your goals.

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