The Pros and Cons of Home Loan Structure Options

The right home loan structure depends on how your income behaves, not just on the interest rate. For business owners, whose income can rise and fall through the year, the structure you choose can matter as much as the rate itself.

This article covers the main structure choices and the trade-off that comes with each. It is written for business owners on the Northern Beaches and across Australia who are weighing up a home loan application.

Fixed Rate vs Variable Rate: Which Suits a Business Owner?

A fixed rate locks your interest rate for a set period, while a variable rate can move up or down with the lender's decisions. Fixed gives certainty. Variable gives flexibility.

Fixed rates suit owners who want a repayment they can plan around, particularly when business cash flow is tight. The main cost is that many lenders limit extra repayments during the fixed term, and leaving early can trigger break costs. You may also miss out if rates fall.

Variable loans usually allow extra repayments and often work with a linked offset account. The trade-off is that your repayments can rise if rates go up. If your business has a quiet quarter at the same time, that can squeeze your budget.

If your fixed term is close to ending, our fixed rate expiry page explains what to expect.

How Does a Split Loan Work?

A split loan divides your loan amount into two parts, with one part on a fixed rate and the other on a variable rate. You choose the proportion.

This suits owners who want some certainty without giving up all flexibility. The variable part can hold an offset account and take extra repayments, while the fixed part gives a steady base repayment.

The trade-off is that you get a partial version of each benefit. You will only benefit from a rate fall on the variable part. Break costs may still apply to the fixed part if you refinance or sell early.

As an example, consider a business owner with a loan of $800,000. They fix $400,000 and keep $400,000 variable. They want steady repayments on half the debt, and they want to park spare business profit in an offset account linked to the variable half. Using an illustrative rate of 6.75% p.a. on both parts, the principal and interest repayment on a 30 year term would be about $2,594 a month for each half, or about $5,188 a month in total. The fixed half stays the same during the fixed term. The variable half moves if the lender changes its rate. After a strong quarter, the owner keeps extra cash in the offset account. This reduces the interest charged on the variable half, and the cash stays available for tax time. The cost is that the offset only helps the variable half, and the fixed half cannot be paid down freely. The rate is illustrative only, so please use a calculator or speak with us for figures that match your situation.

Interest Only vs Principal and Interest Repayments

Interest only repayments cover just the interest for a set period, while principal and interest repayments also reduce the loan balance. Interest only gives lower repayments in the short term. Principal and interest builds equity.

At an illustrative 6.75% p.a., interest only on $800,000 costs about $4,500 a month. That is $54,000 a year divided by 12. Principal and interest over 30 years at the same rate costs about $5,188 a month.

The saving comes with a cost. You do not reduce the loan during the interest only period. When that period ends, repayments switch to principal and interest over the shorter remaining term. For example, after 5 years of interest only on a 30 year loan, the balance is still $800,000 and must be repaid over 25 years. At the same illustrative rate, that is about $5,527 a month.

Interest only periods are more common on investment loans. Lenders often treat owner occupied home loan requests for interest only differently, so ask us what is available for your situation. If a loan is for investment, our investment loans page has more detail.

Offset Account vs Redraw: Where Should Your Spare Cash Sit?

A mortgage offset account is a transaction account linked to your loan, and the balance reduces the interest you are charged. Redraw lets you withdraw extra repayments you have already made.

For a business owner, an offset can hold tax money, GST or a cash buffer while still cutting interest. Offset accounts can come with a higher rate or an annual package fee on some loans, so the saving needs to outweigh that cost. Redraw is usually built into variable loans at low cost, though some lenders can restrict access. Ask whether the loan allows redraw and how quickly you can reach the money.

For questions about tax treatment of interest, please speak with your accountant.

Features Worth Checking Beyond the Rate

The features attached to a loan can change how well it works for you over time. A lower rate on a loan that does not fit your plans may cost more in the long run.

Three features are worth asking about:

• Portability, which lets some loans move to a new property when you sell. Not every lender offers it, and conditions apply.
• The ability to make extra repayments without penalty.
• Whether discounts on the interest rate are ongoing or only apply for an introductory period.

The loan to value ratio, or LVR, also affects your options. If your deposit is under 20% of the property value, Lenders Mortgage Insurance may apply, and this adds to your costs. Your lender, deposit size and circumstances all affect the outcome.

Self-employed income is assessed differently by lenders. Many ask for tax returns and notices of assessment, while some lenders have other documentation options. A broker can match you with a lender whose policy suits how your business reports income. Our borrowing capacity page explains what lenders look at.

Matching Structure to Your Business Cycle

The best-fitting structure is the one that works in your quietest months as well as your busiest. Start with your lowest-income period, then check that you could still meet the repayment.

As a second example, consider a Northern Beaches tradie who earns most of his income in the warmer months. He wants low pressure in winter, and he wants to pay down debt when work is busy. A variable loan with a linked offset account and no penalty for extra repayments suits this pattern. In summer, he moves surplus cash into the offset. In winter, he leaves it there and covers repayments from savings. The outcome is lower interest charged when cash is high and a buffer when it is not. The cost is that his repayment can rise if the lender raises its variable rate, so he tests the budget against a higher rate first.

If you already have a loan, a loan health check can show whether the structure still fits, and refinancing may be an option if it does not. You can also read about our home loans to see the range we work with.

Artisan Finance can compare options from banks and lenders across Australia. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions