When exploring mortgage options, it’s easy to focus on interest rates. A lower rate can mean lower repayments, but just as important is how your loan is structured.
The structure of your mortgage can affect how much interest you pay over time, how easily it fits into your budget, and how flexible it is if your circumstances change.
Why structure matters
How your mortgage is structured can influence how well it fits your financial situation both now and in the future.
For example, a loan that includes a floating portion may allow you to make extra repayments without penalties. This can be useful if you receive additional income during the year, such as from seasonal work, overtime, or a tax refund. Over time, making extra repayments could reduce the total amount of interest you pay.
In contrast, a fixed-rate loan usually offers more certainty around repayment amounts, which can help with budgeting. However, it may limit how much extra you can repay without incurring break fees.
Some borrowers also consider revolving credit loans, which act like a large overdraft linked to your everyday bank account. Interest is only charged on the amount you’ve used, which can help reduce interest costs, but this type of structure generally requires disciplined budgeting habits.
Having the right mix of features can also make it easier to manage changes in your income or expenses. For example, if your income varies or you’re planning a major life event, such as returning to work or moving house, a more flexible loan structure might offer options that a standard fixed rate loan doesn’t.
Even when interest rates are the same, different structures can lead to different long-term outcomes, which is why it’s worth understanding how the options work and seeking personalised advice before making a decision.
Common mortgage structures
Here’s an overview of four common loan types:
Fixed-rate loan
The interest rate is locked in for a set period, generally available for periods of 6 months to 5 years. A fixed rate provides certainty around repayments, which can help with budgeting. However, most fixed loans restrict how much extra you can repay with no fees, and you may also be charged break fees if you repay the loan early or refinance to another lender.
Floating-rate loan
The interest rate can move up or down depending on market conditions. Repayments can vary, but you usually have more flexibility, including the option to make extra repayments or repay the loan in full without penalty.
Revolving credit loan
This functions like a large overdraft tied to your main transaction account. Your income is paid in, and you can draw funds out as needed. Interest is charged only on the outstanding balance, so if you keep this low, you could save on interest. This type of loan suits people with steady income and strong budgeting habits.
Split loan
A split loan divides your mortgage into separate parts, for example, part fixed and part floating. This offers a mix of repayment certainty and flexibility and may help balance short-term stability with longer-term repayment options.
How loan structure supports different needs
Depending on your situation, one or more of these loan types may help you manage your mortgage more effectively.
If you’re looking to reduce interest over time, having a portion of your loan on a floating rate may allow you to make extra repayments when additional income comes in, such as from seasonal work or a tax refund. Making extra payments can reduce the loan principal and the total interest paid over time.
If you have fluctuating income, such as being self-employed or working seasonally, a revolving credit or floating loan may offer more flexibility than a fixed loan. This can make it easier to manage cashflow throughout the year.
If you’re planning ahead for life changes, like returning to work after parental leave or purchasing a new home, a split loan could offer both budgeting certainty and future flexibility. A fixed-rate portion may suit your current budget, while a floating portion gives you options for adjusting repayments down the track.
Talk to a mortgage adviser
There’s no single ‘best’ loan structure. What’s right for you depends on your goals, income, lifestyle, and future plans. If you’d like help understanding your options, get in touch with us for personalised mortgage advice.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.