How to Make Extra Repayments on a Fixed Rate Home Loan

Can You Make Extra Repayments on a Fixed Rate Home Loan?

Most lenders allow extra repayments on a fixed rate home loan, but caps apply. The typical limit is $10,000 to $30,000 per year depending on the lender and loan product. Exceed that cap and you'll trigger break costs, which can run into thousands of dollars if rates have moved significantly since you locked in.

The cap exists because lenders hedge their fixed rate funding in wholesale markets. When you break a fixed loan early or overpay beyond the agreed schedule, the lender's hedge unwinds at a loss if wholesale rates have fallen since your loan commenced. That loss is passed to you as a break cost, calculated using the difference between your fixed rate and the current wholesale rate, multiplied by the remaining term and the amount overpaid.

In our experience, buyers who want repayment flexibility during the fixed period often split their loan rather than fixing the entire amount. A split loan allows you to fix a portion for rate certainty and keep the remainder on a variable rate with unlimited extra repayments and access to an offset account.

How Annual Repayment Caps Work Across Lenders

Repayment caps reset each year on the anniversary of your loan settlement. A $20,000 annual cap means you can pay an extra $20,000 above your scheduled repayments in year one, another $20,000 in year two, and so on until the fixed term ends. The cap does not accumulate. If you only make $5,000 in extra repayments during year one, you don't carry over the unused $15,000 to year two.

Some lenders structure the cap as a percentage of the original loan balance rather than a dollar amount, often 10 per cent. On a $500,000 loan, that's $50,000 per year. Other lenders impose a flat dollar cap regardless of loan size. A handful of lenders still offer no extra repayment allowance on certain fixed products, though these are becoming less common.

When comparing loan products, check whether the lender's cap applies per calendar year or per loan anniversary year. Most use the loan anniversary, but calendar year caps can catch you off guard if you settle mid-year and make repayments assuming a full 12 months of allowance. Also confirm whether the cap applies per split or across the entire loan facility. If you have two fixed splits under the same facility, some lenders pool the cap while others apply it separately to each split.

What Happens When You Exceed the Repayment Cap

Break costs are calculated by the lender using the economic cost method, which compares your fixed rate to the current wholesale swap rate for the remaining term. If you're paying 5.5 per cent fixed and the equivalent swap rate has fallen to 4.0 per cent, the lender charges you the present value of the difference over the remaining period. The longer the remaining term and the larger the overpayment, the higher the cost.

Consider a borrower who fixed $400,000 at 5.8 per cent for five years. Two years in, they receive an inheritance and want to pay down $100,000. Their loan has a $20,000 annual cap, so $80,000 of that payment exceeds the limit. If the current wholesale rate for a three-year term is 4.2 per cent, the lender calculates the present value of a 1.6 per cent margin on $80,000 over three years. In this scenario, the break cost could approach $4,000. If the borrower had instead made the same $100,000 payment but rates had risen since they fixed, the break cost would be zero because the lender is not at a loss.

Some lenders waive break costs in specific circumstances such as selling the property, death, or financial hardship under section 72 of the National Credit Code. Refinancing to another lender during the fixed period does not typically qualify for a waiver. If you're approaching the end of your fixed term, it's often worth holding off on large lump sum payments for a few months rather than triggering a break cost.

Using a Split Loan to Keep Repayment Flexibility

A split structure gives you rate certainty on the fixed portion while maintaining full flexibility on the variable portion. You can make unlimited extra repayments to the variable split, link an offset account, and redraw funds if needed. The fixed split provides a known repayment amount that won't change even if the Reserve Bank moves rates.

We regularly see borrowers split 50/50 or 60/40 depending on their priorities. A 60 per cent fixed, 40 per cent variable structure suits someone who values certainty but expects to make occasional lump sum repayments from bonuses or tax returns. The variable portion absorbs those payments without triggering any caps or penalties. A 70/30 or 80/20 split favours those who prioritise rate protection and don't expect significant extra cash flow during the fixed period.

Split loans do come with two separate interest calculations and potentially two loan accounts, but most lenders manage this within a single facility with one offset account linked to the variable portion only. When your fixed rate expires, you can choose to refix the same split, adjust the proportions, or move the entire balance to variable. Refinancing one split while leaving the other in place is generally not possible without refinancing the entire facility.

Offset Accounts and Fixed Rates

Most lenders do not offer offset accounts on fixed rate loans. The offset account is a feature of variable rate products because the interest calculation adjusts daily based on your loan balance and the linked account balance. Fixed rate loans are funded through wholesale swap contracts with a fixed margin, and the daily recalculation required for an offset undermines that funding model.

If you want an offset account, your options are to keep the entire loan variable, use a split structure with the offset linked to the variable portion, or accept a fixed rate product without offset and instead park surplus funds in a high-interest savings account. The third option is less tax effective for investment loans because offset account balances reduce your interest expense and therefore your deduction, whereas savings account interest is assessable income.

A small number of lenders have recently introduced fixed rate products with limited offset functionality, but these typically come with higher rates and reduced extra repayment caps compared to standard fixed products. The rate premium often outweighs the benefit unless you're consistently holding a substantial offset balance.

When Fixed Rates Still Make Sense Despite Repayment Limits

Fixed rates suit borrowers who value certainty over flexibility. If your income is stable and you don't expect windfalls or the capacity to make large extra repayments, the repayment cap is unlikely to affect you. Budgeting is simpler when your repayment amount doesn't change, and you're protected from rate rises during the fixed period.

Fixed rates can also support borrowing capacity at the application stage. Lenders assess your serviceability using the actual fixed rate plus the buffer rather than a variable rate plus buffer, which can be advantageous when fixed rates sit below variable rates. Once your loan settles, your repayment is locked regardless of whether variable rates rise or fall.

Variable rates offer more flexibility but expose you to rate movements. At current variable rates, even a 0.25 per cent increase can add hundreds of dollars to your monthly repayment. If you're borrowing near your limit or want predictable mortgage repayments for the next few years, a fixed rate or split structure is worth considering even if it means accepting an annual extra repayment cap.

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