Proven Tips to Make Extra Repayments on Fixed Rate Loans

Fixed rate loans protect you from rising interest rates but often come with restrictions on extra repayments.

Most lenders let you make some additional payments during a fixed term, usually between $10,000 and $30,000 per year depending on the product. Go beyond that limit and you'll trigger break costs, which can run into thousands of dollars if rates have moved in the lender's favour since you locked in your rate.

How Much Can You Pay Extra on a Fixed Rate Loan?

You can typically make between $10,000 and $30,000 in extra repayments each year during a fixed term without penalty. The exact limit depends on your lender and the specific product you've chosen. Some lenders set the limit at $10,000 per calendar year, others at $20,000, and a smaller number allow up to $30,000. This amount resets at the start of each new calendar year, not from the date your fixed term started.

Consider a buyer who fixes $500,000 for three years with a lender that allows $20,000 in annual extra repayments. They could pay an additional $20,000 in each of those three years without penalty, reducing the loan balance by $60,000 over the fixed period. If they tried to pay $25,000 in one year, the $5,000 over the limit would trigger break costs.

What Happens If You Exceed the Extra Repayment Limit?

If you exceed the annual extra repayment limit on a fixed rate loan, the lender will charge you break costs. Break costs compensate the lender for the economic loss they incur when you repay more than expected during a fixed term. The lender has locked in funding at a certain rate to match your loan, and if you repay early or pay more than allowed, they lose the interest income they were expecting.

Break costs are calculated based on the difference between your fixed rate and the current wholesale rate the lender can reinvest your funds at. If rates have fallen since you fixed, break costs can be substantial. If rates have risen, break costs might be minimal or even zero. You won't know the exact amount until you request a payout figure or exceed the limit and receive a notice from the lender.

Split Loans: Combining Fixed Security With Repayment Flexibility

A split loan divides your borrowing into two portions, typically one fixed and one variable. You choose the split percentage based on how much rate certainty you want versus how much flexibility you need. A common split is 50/50, but you can structure it as 60/40, 70/30, or any combination that suits your circumstances.

With a split rate structure, your extra repayments go toward the variable portion without restriction. The fixed portion stays protected from rate rises, and the variable portion lets you pay down debt faster when you have surplus cash. This gives you both security and control.

In a scenario like this: you borrow $600,000 and split it with $400,000 fixed at 5.89% for three years and $200,000 on a variable rate at 6.24%. You can make unlimited extra repayments on the $200,000 variable portion while the $400,000 fixed portion protects you from rate increases. If you receive a bonus or tax refund, you can direct it to the variable loan without penalty. Over three years, even modest extra repayments on the variable portion can reduce your overall loan balance substantially.

Can You Link an Offset Account to a Fixed Rate Loan?

Most fixed rate loans do not allow you to link an offset account. Offset accounts work by reducing the interest charged on your loan based on the balance in the account, which conflicts with the way lenders fund fixed rate products. Lenders lock in wholesale funding at a fixed cost to match your loan, and an offset account would reduce the interest they receive without reducing their funding cost.

Variable rate loans typically do allow offset accounts. If you structure a split loan with both fixed and variable portions, you can link an offset account to the variable portion only. Funds in the offset account reduce the interest charged on that variable portion while the fixed portion remains unaffected. This is another reason why a split structure can work well if you want rate protection on part of your borrowing but still want access to offset functionality.

Which Loan Structure Works for Your Situation?

The right structure depends on how much cash flow flexibility you expect over the fixed term. If you're likely to receive irregular income such as bonuses, commissions, or investment returns, a split loan lets you put that money to work without penalty. If your income is steady and predictable with little surplus, fixing the full loan amount might suit you.

For buyers who want to make regular extra repayments but also want some protection from rate rises, a 50/50 or 60/40 split often works well. The fixed portion locks in a rate on the majority of the debt, and the variable portion absorbs your extra repayments. Refinancing into a split structure from an existing fixed loan is possible, but you'll need to compare the break costs on your current loan against the benefit of the new structure.

Choosing a Fixed Term That Matches Your Repayment Plans

Fixed terms range from one to five years, with most borrowers choosing between two and three years. A shorter fixed term means less time locked into the repayment restrictions, but it also means you'll revert to a variable rate sooner and need to consider your options again. A longer fixed term gives you more certainty but less flexibility.

If you expect to come into money during the fixed term, through inheritance, property sale, or another windfall, a shorter fixed term or a split structure will give you more options to pay down the loan without penalty. If your goal is simply to lock in a rate and ride out a period of expected rate rises, a longer fixed term on the full loan amount might be appropriate.

When you're considering a construction loan or purchasing as a first home buyer, understanding these repayment restrictions before you lock in a rate can help you choose a structure that doesn't penalise you later.

Call one of our team or book an appointment at a time that works for you. We'll walk through your income patterns, your plans for extra repayments, and the lender products that give you the flexibility you need without giving up rate protection.

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