Understanding the basics of loan structure options

Most lenders offer the same loan features, but the way you combine those features determines how much you pay each month and how quickly you build equity.

Principal and Interest vs Interest Only: How the Repayment Type Changes Your Loan

Principal and interest repayments reduce the loan balance with every payment. Interest only repayments cover the interest cost each month without reducing what you owe.

Consider a nurse purchasing an owner occupied property who chooses principal and interest repayments. Each month, part of the payment reduces the loan balance. Over time, the interest portion shrinks and the principal portion grows. The loan is fully repaid at the end of the term. An interest only loan allows lower monthly payments during the interest only period, which can suit nurses managing cash flow during probation or contract work. At the end of that period, repayments revert to principal and interest and increase substantially. The loan balance remains unchanged during the interest only period, so no equity is built through repayment alone.

Interest only periods typically run for one to five years. Some lenders allow consecutive interest only periods on investment properties, but owner occupied loans are generally limited to shorter periods. If your LVR is above 80 per cent and you request an interest only period longer than five years, APS 112 classifies the loan as non-standard, which increases the capital the lender must hold and may affect pricing or approval.

Fixed Rate, Variable Rate, and Split Loan Structures

A variable rate moves with market conditions and lender pricing decisions. A fixed rate locks the interest rate for a set term, usually between one and five years.

In our experience, nurses on permanent contracts often fix part of their loan to protect against rate increases while keeping part variable to allow extra repayments without penalty. A split loan divides the total loan amount into separate portions, each with its own rate type and features. One portion might be fixed at a rate locked in at application, while the other remains variable with an offset account attached. The variable portion accepts unlimited extra repayments. The fixed portion does not, and breaking the fixed term early can trigger break costs calculated on the difference between your fixed rate and the lender's cost of funds at the time of break.

Some lenders calculate the split as a dollar amount per portion. Others calculate it as a percentage of the total loan. If you fix $300,000 and keep $200,000 variable, the split remains $300,000 fixed and $200,000 variable even as you pay down the variable portion. If the lender recalculates the split as a percentage, paying down the variable portion may shift the balance between fixed and variable unless you specify otherwise at the outset.

Offset Accounts and Redraw: How You Access Extra Payments

An offset account is a transaction account linked to your loan. The balance in the offset reduces the loan balance used to calculate interest. If you owe $400,000 and hold $30,000 in a linked offset, you pay interest on $370,000.

Redraw allows you to withdraw extra repayments you have made above the minimum. Both features reduce interest, but offset balances remain your money in a separate account. Redraw balances are held within the loan and may be subject to lender conditions on withdrawal. Some lenders restrict redraw on fixed rate portions or charge a fee per withdrawal. Offset accounts typically have no withdrawal restrictions, though they may carry a monthly account fee or require a package with an annual fee.

Midwives moving between contracts or taking parental leave often use offset accounts to park savings and reduce interest without locking funds into the loan. The offset balance can be accessed at any time without affecting the loan contract or requiring lender approval.

Loan Portability and Split Settlement Structures

A portable loan allows you to transfer the existing loan to a new property without discharging and reapplying. Portability can avoid break costs on a fixed rate loan if you sell before the fixed term ends, though not all lenders offer this feature and conditions vary.

If you sell a property securing a fixed rate loan and your lender permits portability, you can transfer the loan to the new purchase. The lender assesses the new property as security, and you may need to top up the loan if the purchase price exceeds the sale price. If portability is not available or not permitted by the lender, you discharge the existing loan at settlement of the sale. If the discharge occurs during a fixed rate term, break costs apply unless the lender waives them, which is rare.

Split settlement structures apply when you purchase before you sell. A bridging loan allows you to hold both properties during the overlap period. Some lenders structure this as two separate loans, one for the existing property and one for the new property. Others structure it as a single loan secured by both properties. The structure affects how offset accounts are linked, how repayments are calculated during the bridging period, and how the loan is split once the original property sells.

How Loan Structure Affects Borrowing Capacity and Serviceability

Lenders assess your ability to service a loan at a rate at least 3.0 percentage points above the product rate. The repayment type affects the assessed repayment amount.

Principal and interest repayments are assessed at the higher buffered rate over the remaining loan term. Interest only repayments are assessed differently depending on the lender. Some assess interest only repayments as if they were principal and interest from day one. Others assess the interest only repayment during the interest only period, then assess principal and interest repayments at the buffered rate for the remaining term. The latter approach can reduce your assessed borrowing capacity because the principal and interest repayments after the interest only period are higher than they would be on a 30 year term.

If you apply for a loan with a five year interest only period, the lender assesses your ability to service principal and interest repayments over the remaining 25 years at the buffered rate. The shorter remaining term increases the monthly repayment used in the serviceability calculation, which can reduce the amount you can borrow. This is separate from your actual repayments during the interest only period, which are lower.

Loan Packaging and Fee Structures Across Products

Most lenders bundle features into packages that carry an annual fee, typically between $300 and $400. The package may include offset accounts, rate discounts, fee waivers on additional products such as credit cards, and portability.

Some lenders offer basic variable products with no annual fee and no offset account. The interest rate may be higher than the equivalent packaged product, even after accounting for the annual fee. Other lenders apply the rate discount only if you hold a package, so the net cost of the package depends on the loan amount, the rate differential, and how much you use the included features.

If the package rate is 0.20 per cent lower than the basic rate and you owe $500,000, the interest saving is roughly $1,000 in the first year. After deducting a $395 annual package fee, the net benefit is around $605. If you also use the offset account to hold $20,000 in savings, the additional interest saving at current variable rates is another $1,000 or more, depending on the rate. The package becomes worth the cost.

Some nurses refinance out of a package after their circumstances change, particularly if they no longer need the offset or have paid the loan down to a point where the rate differential does not justify the annual fee. Refinancing into a no-fee product can reduce costs, but switching costs and discharge fees must be factored into the comparison.

Call one of our team or book an appointment at a time that works for you. We structure loans for nurses and midwives based on your rostering, income type, and whether you need access to equity for future purchases or renovations.

Frequently Asked Questions