Fixed rate investment loans let you lock in your interest rate for a set period, typically between one and five years.
When you're holding an investment property, knowing exactly what your repayments will be month after month gives you a clear picture of your rental income against your costs. That certainty matters when you're calculating whether the property will deliver positive cash flow or how much negative gearing you'll claim. If you're considering your investment loan options, understanding how fixed rates work within your broader strategy can shape the way you structure your borrowing.
What Fixed Rate Periods Are Available on Investment Property Finance
Most lenders offer fixed rate periods from one to five years, with three years being a common choice among property investors. Shorter terms give you less protection against rate rises but also mean you're not locked in if rates fall. Longer terms provide extended certainty but reduce flexibility if your circumstances change or if you want to access equity sooner than expected.
Consider an investor who purchases a rental property in Craigieburn with an $500,000 loan fixed at the current rate for three years. During that period, even if variable interest rates climb, their repayments stay the same. That makes budgeting straightforward and protects the passive income they're generating from rental yield. The challenge comes if they want to sell the property or refinance before the fixed term ends, which typically triggers break costs.
How Break Costs Work When You Exit a Fixed Rate Early
Break costs are calculated based on the difference between the fixed interest rate you're paying and the rate the lender can now charge for the remaining fixed period. If rates have fallen since you locked in, you'll usually pay a break cost because the lender is losing income. If rates have risen, the break cost is often zero or minimal.
In our experience, investors underestimate how significant these costs can be. An investor who fixed $450,000 at a higher rate and then needs to sell two years into a three-year term might face break costs in the tens of thousands of dollars, depending on how far rates have moved. Before committing to a fixed rate, think through scenarios where you might need to exit early, whether that's selling, refinancing to access equity for another purchase, or restructuring your loan.
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Interest Only Repayments on Fixed Rate Investment Loans
Interest only repayments are available on most fixed rate investment loans, and they reduce your monthly outlay by deferring principal repayments for a set period, typically up to five years. This approach maximises tax deductions because you're only paying interest, which is a claimable expense, while keeping more cash in your pocket each month to put toward other investments or expenses.
Many investors choose interest only on their investment property loan while paying down principal on their owner-occupied home. From a tax perspective, this makes sense because interest on investment borrowing is deductible, while interest on your home loan is not. If you're building a property portfolio, keeping repayments lower on investment properties can also help you borrow more for your next purchase by improving your serviceability in the lender's assessment.
Rate Discount Structures and How They Apply to Fixed Rates
Lenders often advertise variable rate discounts off a reference rate, but fixed rates don't work the same way. A fixed interest rate is a standalone figure, not a discount off a benchmark. That means when you lock in, you're committing to that exact rate regardless of what happens to the lender's standard variable rate during the fixed term.
Some lenders offer a lower fixed rate if you're willing to pay principal and interest rather than interest only, or if you're borrowing at a lower loan to value ratio. An investor with a 20% deposit might access a more attractive fixed rate than someone borrowing at 90% LVR, particularly if they're also avoiding Lenders Mortgage Insurance. It's worth comparing how different lenders price their fixed rates based on these factors, as the variance can be substantial.
Splitting Your Loan Between Fixed and Variable Rates
Many investors split their investment loan between fixed and variable portions to balance certainty with flexibility. A common approach is to fix 50% to 70% of the loan amount and leave the remainder on a variable rate. The fixed portion protects you from rate rises, while the variable portion lets you make extra repayments or redraw funds without triggering break costs.
As an example, an investor borrowing $600,000 for a rental property in Tarneit might fix $400,000 for three years and keep $200,000 on a variable rate. If they receive a bonus or tax refund, they can pay down the variable portion without penalty. If they need to access funds to cover vacancy periods or unexpected body corporate levies, they can redraw from the variable portion. If they decide to sell before the fixed term ends, only the fixed portion attracts break costs, reducing the total penalty. This structure works well when you're uncertain about your future plans but still want some protection against rising rates.
What Happens When Your Fixed Rate Term Ends
When the fixed rate period expires, your loan automatically reverts to the lender's standard variable rate unless you take action. That revert rate is almost always higher than the discounted variable rate offered to new customers, so your repayments can jump significantly if you don't refinance or renegotiate.
About three months before your fixed term ends, contact your broker to review what's available. You might choose to fix again, switch to a variable rate with a better discount, or move to a different lender offering more attractive investor interest rates. Timing this correctly means you avoid sitting on an uncompetitive rate and paying more than necessary, which erodes the rental income you're working to generate.
If you're thinking through how a fixed rate fits within your property investment strategy, or you're weighing up whether to lock in now or wait, we're here to talk it through with you. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
What is the typical fixed rate period for an investment loan?
Most lenders offer fixed rate periods from one to five years on investment loans, with three years being a common choice. Shorter terms provide less protection against rate rises but more flexibility, while longer terms give extended certainty at the cost of reduced options if your circumstances change.
Can I make extra repayments on a fixed rate investment loan?
Most fixed rate investment loans restrict extra repayments or charge penalties if you exceed a certain threshold, often around $10,000 to $30,000 per year. If you want to make larger additional payments, consider splitting your loan so part remains on a variable rate.
What are break costs and when do they apply?
Break costs are fees charged when you exit a fixed rate loan early by selling, refinancing, or paying off the loan. They're calculated based on the difference between your fixed rate and current wholesale rates, and can be substantial if rates have fallen since you locked in.
What happens when my fixed rate term ends?
When your fixed rate period expires, your loan automatically reverts to the lender's standard variable rate, which is usually higher than discounted rates available to new customers. You should review your options about three months before the term ends to avoid paying an uncompetitive rate.
Should I choose interest only or principal and interest on a fixed rate investment loan?
Interest only repayments maximise your tax deductions and reduce monthly outgoings, which can help with cash flow and borrowing capacity for additional properties. However, some lenders offer lower fixed rates if you choose principal and interest repayments, so the right choice depends on your overall strategy and serviceability.
