Fixed rate investment loans offer rate certainty, but they come with restrictions on extra repayments that can affect your strategy.
Most lenders allow between $10,000 and $30,000 in extra repayments per year on a fixed rate investment loan without penalty. Go beyond that limit, and you'll face break costs that can run into thousands of dollars. The restriction exists because lenders hedge fixed rates in wholesale markets, and when you pay out early or overpay significantly, they wear the cost of unwinding those positions.
Why Extra Repayments on Investment Loans Work Differently
Most property investors structure their loans as interest-only to maximise tax deductions and preserve cash flow for other investments or personal use. When you make extra repayments on an interest-only investment loan, those payments typically sit in an offset or redraw facility rather than reducing the principal balance immediately. This keeps your interest charges high, which increases your deductible expenses.
On a fixed rate loan, the offset option usually isn't available. Some lenders offer redraw on fixed investment loans, but the annual cap still applies. Consider a scenario where you're holding $40,000 in surplus cash and want to park it against your investment loan. On a variable rate loan with offset, that $40,000 reduces your interest daily without affecting your deductibility. On a fixed rate loan, you can only deposit up to the yearly cap without triggering penalties, and any amount above that either sits elsewhere or costs you to deposit.
This difference becomes relevant when you're deciding between fixing all or part of your investment loan. If you expect irregular cash flow, rental income fluctuations, or plan to use equity in the near term, locking the full amount on a fixed rate can limit your flexibility.
How Fixed Rate Break Costs Are Calculated
Break costs apply when you pay more than the allowable extra repayment amount, refinance, or exit a fixed rate loan before the term ends. The calculation compares the interest rate you're locked into with the rate the lender can now earn by lending that money elsewhere. If rates have fallen since you fixed, the lender loses income, and you pay the difference.
In our experience, clients underestimate how quickly break costs accumulate when rates drop even slightly. A $500,000 fixed loan with two years remaining and a 0.5% rate difference can generate break costs around $5,000. If you're planning to sell the investment property or refinance to access equity, those costs need to factor into your numbers. Some lenders will allow you to port a fixed rate loan to a new property, which avoids break costs, but this option isn't universal and often requires the new loan amount to be similar to the existing balance.
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Splitting Your Investment Loan Between Fixed and Variable
Splitting your loan means fixing part of the balance and leaving the rest on a variable rate. A 50/50 split gives you rate protection on half the loan while keeping offset benefits and repayment flexibility on the other half. You can also split unevenly depending on your priorities.
As an example, an investor with a $600,000 loan might fix $400,000 for three years to lock in repayments on the majority of the debt, and leave $200,000 variable with an offset account attached. If they receive a $30,000 bonus or rental income surplus, they can deposit it into the offset without restriction. The variable portion also provides a buffer if they want to refinance or access equity within the fixed term, since break costs only apply to the fixed portion. The variable split gives them room to adapt without paying penalties.
This structure works well when you want certainty but don't want to lock yourself into a position that's expensive to exit. It also reduces the risk of paying break costs if you need to refinance before the fixed term ends.
Interest-Only Versus Principal and Interest on Fixed Investment Loans
You can fix an investment loan on either an interest-only or principal and interest basis. Most investors choose interest-only because it keeps repayments lower and maximises deductions. Fixed interest-only terms are typically available for one to five years, after which the loan either reverts to variable or requires refinancing.
If you're fixing on a principal and interest basis, your repayments will be higher, and you'll be reducing the loan balance over time. This can make sense if your goal is to pay down debt rather than maximise leverage, or if you're nearing retirement and want to reduce exposure. But for investors focused on building a portfolio or preserving cash for further purchases, interest-only remains the more common choice.
Be aware that interest-only periods are not indefinite. If your fixed interest-only term expires and you don't refinance, the loan may revert to principal and interest, which will increase your repayments significantly. Planning ahead for that transition is part of managing your investment loan structure over time.
What Happens When Your Fixed Rate Term Ends
When the fixed term expires, your loan automatically converts to the lender's standard variable rate unless you refinance or negotiate a new fixed term. The standard variable rate is typically higher than the discounted variable rates offered to new customers, so letting your loan roll over without reviewing your options usually means you'll be paying more than you need to.
Most lenders will contact you a few months before the fixed term ends, but it's your responsibility to act. If you want to refix, you'll need to apply again, and the rate will reflect current market conditions. If rates have risen since you first fixed, your repayments will increase. If they've fallen, you may be able to lock in a lower rate. Alternatively, you can switch to variable or consider refinancing to another lender if they're offering more suitable terms or features.
This is also the time to reassess your loan structure. If your circumstances have changed, such as increased equity, a second property purchase, or a shift in your tax position, you may want to restructure rather than simply renewing the same arrangement.
When Fixing an Investment Loan Makes Sense
Fixing makes sense when you want certainty over your repayments and believe rates are likely to rise. It's particularly relevant for investors with limited cash flow buffers, where a rate increase would affect your ability to hold the property comfortably. If your rental income only just covers your repayments, fixing can remove the risk of rate rises pushing you into negative cash flow territory.
Fixing also suits investors who are not planning to sell, refinance, or make large extra repayments during the fixed period. If your strategy is to hold long term, collect rental income, and let the property appreciate, a fixed rate can provide stability without the downsides mattering as much.
On the other hand, if you're actively building a portfolio, planning to access equity within a few years, or expect lump sum income that you want to park against the loan, a variable rate or split structure will give you more flexibility. The decision depends on your goals, cash flow, and how much certainty you're willing to pay for.
Call one of our team or book an appointment at a time that works for you. We'll help you work through your loan structure, compare fixed and variable options across lenders, and make sure the setup fits your investment strategy and circumstances.
Frequently Asked Questions
Can I make extra repayments on a fixed rate investment loan?
Most lenders allow between $10,000 and $30,000 in extra repayments per year on a fixed rate investment loan without penalty. Exceeding that limit will trigger break costs, which can be significant if rates have fallen since you locked in your rate.
What are break costs on a fixed investment loan?
Break costs apply when you pay out, refinance, or exceed the extra repayment limit on a fixed rate loan before the term ends. The lender calculates the cost based on the difference between your fixed rate and what they can now earn by lending that money elsewhere.
Should I fix my investment loan on interest-only or principal and interest?
Most investors choose interest-only to maximise tax deductions and preserve cash flow. Principal and interest repayments reduce your loan balance over time but increase your repayments and reduce your deductible interest expense.
What happens when my fixed rate term ends?
Your loan automatically converts to the lender's standard variable rate unless you refinance or negotiate a new fixed term. Standard variable rates are typically higher than discounted rates, so it's worth reviewing your options before the term expires.
Can I split my investment loan between fixed and variable?
Yes, splitting your loan allows you to lock in part of the balance for rate certainty while keeping the rest variable for flexibility. This structure gives you access to offset accounts and extra repayment options on the variable portion without restrictions.
