First Home Buyer Guide Episode 2: Fixed vs Variable Home Loan Sydney, Interest Only vs Principal and Interest, and Offset Account First Home Buyer Tips
- Lenny Briffa
- Apr 15
- 3 min read
Updated: Jul 24
Interest Only vs Principal and Interest: How Repayments Work
When you take out a home loan, you'll need to choose how your repayments are structured. The two main options are principal and interest, or interest only.
Principal and interest repayments cover two things every time you pay: the interest charged, and a portion of the actual loan balance (the principal). Over the life of the loan, this steadily reduces what you owe - so by the time your loan term ends, it's fully paid off.
Interest only repayments cover just the interest for a set period, usually 1-5 years. You're not paying down the loan balance at all during this time - just the cost of borrowing it.
Weighing up interest only vs principal and interest comes down to your goals:
Lower repayments now: interest only repayments are lower each month, since you're not paying down the balance - useful if cash flow is tight early on.
Pay less interest overall: principal and interest means you pay less interest over the life of the loan, since the balance (and the interest charged on it) shrinks with every payment.
Investment property strategy: some investors deliberately choose interest only for an investment property to maximise cash flow and tax deductions, while using principal and interest on their own home.
Most lenders will only offer an interest only period for a limited window before requiring the loan to switch back to standard principal and interest repayments.
Fixed vs Variable Home Loan Sydney: Which Is Right for You?
The next major decision is how your interest rate behaves - and this is one of the most common questions we get from first home buyers.
Variable rate home loans move up and down in line with the cash rate and broader market conditions. Your home loan repayments can rise or fall over time, and variable loans typically come with more flexibility - unlimited additional repayments, offset accounts, and redraw facilities.
Fixed rate home loans lock in your interest rate for a set period (usually 1-5 years), known as the fixed term. Your repayments stay exactly the same for that fixed term, regardless of what happens to the cash rate - which makes budgeting easier, especially in your first year or two of homeownership. The trade-off is less flexibility: most fixed rate home loans cap how many additional repayments you can make, and offset accounts are rarely available.
For Sydney first home buyers weighing up a fixed vs variable home loan, a common middle ground is a split loan - fixing part of the balance for certainty, while keeping the rest variable for flexibility.
Offset Account First Home Buyer Guide: Redraw vs Offset
Finally, it's worth understanding the difference between an offset account and a redraw facility - both save you interest, but they work differently.
An offset account is a separate bank account (essentially a transaction account) linked to your home loan. Every dollar sitting in it "offsets" your loan balance - so if you owe $500,000 and have $20,000 in your offset account, you're only charged interest on $480,000. Your money stays fully accessible via a debit card at any time.
A redraw facility works differently. When you make additional repayments beyond your minimum, that extra money goes directly into the loan itself, reducing the balance. If you want that money back later, you need to formally "redraw" it - and for an investment property, doing so can affect how much of your loan interest remains tax-deductible.
For most first home buyers, an offset account is the more flexible option - particularly if you expect to need access to your savings at some point down the track.
This is Episode 2 in our First Home Buyer video series. Catch up on Episode 1: Your Property Journey Starts Here, or jump ahead to Episode 3: Your Borrowing Power.
Want to see how these choices affect your repayments? Try our home loan calculators, or apply now to get started.
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