Types of Mortgages in Australia Compared

Choosing the right mortgage type is one of the most impactful financial decisions you will make. The difference between a variable and fixed rate — or the decision to use an offset account — can mean tens of thousands of dollars saved or lost over the life of your loan.

Variable Rate Mortgages

Variable rate loans are the most popular choice in Australia, and for good reason. Your interest rate moves with the market, typically influenced by the Reserve Bank of Australia’s cash rate decisions.

The key advantages are flexibility and features. Most variable loans allow unlimited extra repayments without penalties, come with redraw facilities, and can be paired with offset accounts. If rates drop, your repayments decrease automatically.

The downside is uncertainty. When the RBA raises rates, your repayments go up — sometimes significantly. During a rising rate cycle, this can strain budgets that were set during lower-rate periods.

Variable loans suit borrowers who want flexibility, plan to make extra repayments, and can handle some fluctuation in their monthly payments. Use our mortgage calculator to model how rate changes affect your repayments.

Fixed Rate Mortgages

A fixed rate mortgage locks in your interest rate for a set period — usually 1, 2, 3, or 5 years. Your repayments stay exactly the same regardless of what the RBA does during that period.

The certainty is the main advantage. You know exactly what you will pay each month, making budgeting straightforward. If rates rise during your fixed term, you are protected.

The trade-offs are significant though. Most fixed loans limit extra repayments to $10,000 to $20,000 per year. Break fees can be substantial if you want to refinance, sell, or switch during the fixed period. And if rates fall, you are stuck paying the higher fixed rate until your term ends.

Fixed loans suit borrowers who prioritise payment certainty, are on a tight budget with no room for payment increases, or believe rates are about to rise.

Split Loans

A split loan divides your mortgage into a fixed portion and a variable portion. You choose the ratio — 50/50, 60/40, or whatever suits your situation.

This gives you partial protection against rate rises (from the fixed portion) while keeping the flexibility and potential savings of the variable portion. Many Australian borrowers find this a sensible compromise.

For example, on a $500,000 loan, you might fix $300,000 for 3 years and keep $200,000 variable. The variable portion can have an offset account and accept unlimited extra repayments.

Interest-Only Loans

With an interest-only loan, you pay only the interest for a set period (usually 1 to 5 years). This means lower repayments during the interest-only period, but you are not reducing the loan balance at all.

After the interest-only period ends, your repayments jump significantly because you now have to repay the full principal over the remaining term.

Interest-only loans are primarily used by property investors who want to maximise tax deductions (since interest is tax-deductible on investment properties) and keep cash flow available for other investments. They are generally not recommended for owner-occupiers unless you have a specific short-term reason.

Loans with Offset Accounts

An offset account is a feature rather than a loan type — it is a transaction account linked to your mortgage. The balance offsets your loan when calculating interest.

With $50,000 in your offset against a $400,000 loan, you pay interest on $350,000. Over 30 years, this can save you over $40,000 in interest and shave years off your loan term.

Offset accounts work with variable rate loans. Some lenders charge a slightly higher rate or monthly fee for the offset feature, so calculate whether the savings outweigh the cost. Our mortgage guide explains offset accounts in more detail.

Which Type Should You Choose?

There is no universally best mortgage type. Your choice depends on your risk tolerance (can you handle payment fluctuations?), your plans (will you sell or refinance within a few years?), your cash flow (do you have money to put in an offset?), and the current rate environment.

A mortgage broker can model different scenarios across multiple lenders. Read our property buying guide for how loan selection fits into the broader purchasing process, or browse our FAQs for quick answers.