Fixed Rate Loans Lock Your Repayment, Not Your Loan Structure
A fixed rate home loan holds your interest rate and repayment steady for a set period, typically between one and five years. After that term ends, the loan reverts to a variable rate unless you refinance or negotiate a new fix. For someone running a business, that predictability matters when your income fluctuates month to month and you need to know exactly what's leaving your account each fortnight.
Consider a self employed consultant who fixes $400,000 of a $500,000 loan at 5.89% for three years. The repayment on that portion is $2,367 per month, and it stays at that figure regardless of whether the Reserve Bank raises rates twice or cuts them. The remaining $100,000 on a variable rate gives access to offset and the ability to make extra repayments without penalty. That structure works when you want certainty on the bulk of your debt but still need room to move when a client pays early or a large invoice clears.
Most lenders allow you to fix between 10% and 100% of your loan amount. Fixing the entire balance removes offset access and caps extra repayments at around $10,000 to $30,000 per year depending on the lender. If your business regularly holds cash in an offset account to reduce interest, fixing everything costs you that benefit. Splitting the loan between fixed and variable lets you lock in certainty on part of the debt while keeping offset access on the variable portion.
Why Self Employed Borrowers Use Fixed Rates Differently
Employed borrowers often fix rates to protect against rising repayments. Self employed borrowers fix rates to smooth out cash flow when income timing is irregular. A tradie might invoice $80,000 in March and $25,000 in April. Fixed repayments of $3,200 per month mean the loan cost is the same in both months, even though revenue moves around. Variable repayments would still be the same amount each month at the same rate, but the fixed rate removes the risk of that repayment suddenly jumping if rates rise during a lean quarter.
The trade-off is flexibility. If you sell an investment property or receive a large tax refund and want to pay down $50,000 in one go, a fixed rate loan will charge break costs if you exceed the annual repayment limit. Those costs can run to five figures if rates have fallen since you fixed. Borrowers who use addbacks to increase their borrowing capacity often have lumpy cash flow, and a fully fixed loan doesn't suit that pattern unless they plan to park surplus cash elsewhere.
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Break Costs Reflect the Lender's Funding Loss
Break costs apply when you pay out, refinance, or make extra repayments beyond the annual cap on a fixed rate loan before the fixed term ends. The lender funds your fixed rate by borrowing at wholesale rates for the same term. If you break the contract early, they're left holding that funding commitment and may not be able to redeploy it at the same margin. You pay the difference.
The calculation compares the fixed rate you're paying to the rate the lender can now charge for the remaining term. If you fixed at 5.89% for five years and rates have dropped to 5.39% after two years, the lender loses 0.50% per year for the remaining three years on the amount you're repaying early. On a $400,000 loan, that's around $6,000 in break costs. If rates have risen since you fixed, the break cost is zero because the lender can redeploy the funds at a higher rate.
Some lenders publish break cost calculators on their website. Others require you to call for a quote. If you're considering refinancing your fixed rate loan, get the break cost figure in writing before you commit to a new lender. The cost can exceed the value of any rate discount you're chasing, particularly if you're only 12 to 18 months into a five year fix.
The Split Loan Structure That Matches Irregular Income
A 70/30 or 60/40 split between fixed and variable is common among self employed borrowers. Fix the larger portion for repayment certainty, keep the smaller portion variable with an offset account attached. When cash builds up in the offset, it reduces interest on the variable portion. When cash flow tightens, you're still only committed to the fixed repayment on the majority of the loan.
A contractor with a $600,000 loan might fix $420,000 at 5.79% for three years and leave $180,000 variable at 6.19% with a linked offset. Monthly repayments are $2,477 on the fixed portion and $1,096 on the variable portion before offset, totaling $3,573. If they hold $60,000 in the offset account, interest is charged on $120,000 instead of $180,000, dropping the variable portion to $731 per month. The fixed portion stays at $2,477 regardless. That structure delivers predictability where it's needed and flexibility where it helps.
The split also reduces break cost exposure. If you need to refinance or sell before the fixed term ends, the break cost applies only to the fixed portion. On a $420,000 fixed portion, a 0.50% rate difference over two remaining years costs around $4,200. On a fully fixed $600,000 loan, the same scenario costs around $6,000. The saving might not sound large, but it's the difference between refinancing being viable or staying put for another two years.
Choosing a Fixed Term That Aligns With Your Business Cycle
A three year fixed term is the most common choice. It's long enough to provide meaningful repayment certainty but short enough that you're not locked in through multiple business cycles. A five year fix offers a lower rate if the yield curve is flat or inverted, but it also increases the chance you'll need to break early because your circumstances change.
If you're planning to refinance using your latest financials within two years because your income has grown and you want to increase your borrowing capacity, a one or two year fix makes more sense. You get some rate protection without the long tail of break cost risk. If your income is stable and you want to lock in repayments through a period where you're focused on growing the business rather than managing loan costs, a four or five year fix is worth considering.
Some borrowers stagger fixed terms by splitting the loan into two fixed portions with different end dates. Fix $300,000 for two years and $300,000 for four years. When the first portion expires, you can refix, switch to variable, or pay it down depending on where rates are at the time. The second portion still has two years of certainty remaining. That approach reduces the risk of the entire loan rolling off a fixed rate at the worst possible moment in the rate cycle.
What Happens When the Fixed Rate Expires
At the end of the fixed term, your loan automatically reverts to the lender's standard variable rate unless you take action. That revert rate is typically 0.20% to 0.40% higher than the discounted variable rate offered to new customers. If your fixed rate was 5.89% and the revert rate is 6.59%, your repayments jump by around 11% overnight.
Most lenders contact you 30 to 90 days before the fixed term ends and offer a retention rate, either fixed or variable. That rate will be closer to new customer pricing but rarely matches it exactly. If you've been in the loan for three years and your circumstances have improved, refinancing to a new lender or renegotiating with your current lender can save $2,000 to $5,000 per year. If your income has dropped or your business structure has changed, staying with your current lender at the retention rate is often the safer move because you won't need to requalify.
For self employed borrowers, the expiry date also creates an opportunity to switch structures. If you've moved from a sole trader to a company or trust, or if you've paid down enough of the loan that LMI no longer applies, the expiry date is a natural point to refinance into a structure that better suits your current position without triggering break costs.
Rate Discounts and Fixed Rate Pricing for Self Employed Borrowers
Lenders price fixed rate loans based on the loan amount, LVR, and your employment type. A self employed borrower using two years of financials and lodging full tax returns will access the same fixed rates as an employed borrower at most major lenders. If you're using bank statements or 12 months of financials because you've only been trading for a short period, the fixed rate might be 0.10% to 0.30% higher, or the lender might not offer a fixed rate at all.
The fixed rate itself doesn't change month to month in the same way variable rates do, but lenders adjust their fixed rate pricing every few days based on wholesale funding costs. If you receive a rate quote on Monday and don't lock it in until Friday, the rate might have moved. Some lenders allow you to lock a fixed rate at application, others lock it at settlement. If rates are rising, a lender that locks at application protects you. If rates are falling, you'd prefer a lender that locks at settlement.
Call one of our team or book an appointment at a time that works for you. We'll walk through your cash flow pattern, identify the right split between fixed and variable, and line up lenders who price self employed fixed rate loans on the same terms as employed borrowers. If your fixed term is ending in the next 90 days, we'll have break cost figures and retention offers from your current lender within 48 hours so you can decide whether to refix, switch to variable, or refinance before the revert rate kicks in.
Disclaimer: This article provides general information only and does not take into account your personal objectives, financial situation or needs. It does not constitute personalised credit, financial, tax or legal advice. Lending criteria, interest rates, fees and government schemes may change. All loans are subject to lender assessment and approval; eligibility and approval are not guaranteed. Any examples are illustrative only. Seek advice tailored to your circumstances before making financial decisions.
