Fixed Rate Investment Loans and Extra Repayments Explained

What You Need to Know About Fixed Rate Investment Loans

If you're a property investor in Cannon Hill looking to build wealth through property, understanding your investment loan options is crucial. One question that comes up time and time again is whether you can make extra repayments on a fixed rate investment loan - and if so, what are the implications?

Let's break down everything you need to know about fixed rate loans for investment properties and how they handle additional repayments.

How Fixed Interest Rates Work on Investment Property Finance

When you take out an investment loan with a fixed interest rate, you're locking in a specific rate for a set period - typically between one to five years. This means your repayments stay the same regardless of what happens to the cash rate or variable interest rate movements in the market.

For property investors, this offers several benefits:

• Certainty in calculating investment loan repayments for budgeting purposes
• Protection against interest rate increases during the fixed period
• Predictable cash flow management when relying on rental income
• Easier planning for your property investment strategy

However, this stability comes with certain conditions, particularly when it comes to making extra repayments.

The Reality of Extra Repayments on Fixed Rate Loans

Here's where many property investors get caught out. Most fixed rate investment loan products have strict limits on additional repayments. While a variable rate loan typically allows unlimited extra repayments without penalty, fixed rate loans are different.

Most lenders will allow you to make extra repayments of around $10,000 to $30,000 per year on a fixed rate loan without incurring break costs. However, if you exceed this threshold, you'll likely face what's called 'break costs' or 'early repayment fees'.

Understanding Break Costs

Break costs exist because when you fix your investment loan interest rate, the lender essentially locks in funding at that rate for the fixed term. If you make large additional repayments, the lender loses the expected interest income they'd calculated on.

These costs can be substantial - sometimes running into thousands of dollars - so it's essential to understand the investment loan features of your particular product before committing to a fixed rate.

Factors that influence break costs include:

• How much you're overpaying beyond the allowed limit
• How long is remaining on your fixed term
• The difference between your fixed interest rate and current investor interest rates
• The specific investment loan amount you're repaying early

Alternative Strategies for Property Investors

If you're someone who likes the flexibility to make extra repayments while still wanting some rate certainty, consider these approaches:

Split Loan Structure

Many Cannon Hill property investors use a split loan structure. This means dividing your loan amount between fixed and variable portions. For example, you might fix 60% of your investment property loan while keeping 40% on a variable interest rate.

This strategy gives you:

• Partial protection against rate rises
• Flexibility to make unlimited extra repayments on the variable portion
• Access to both types of investment loan benefits
• Better alignment with your broader property investment strategy

Interest-Only vs Principal and Interest

Another consideration is whether to structure your loan as interest only or principal and interest. Many property investors choose interest only investment loans to maximise tax deductions on their claimable expenses, as the entire interest payment is typically tax-deductible when buying an investment property.

However, some investors prefer principal and interest repayments to actively reduce their loan amount over time and build equity faster. This decision should align with your goals around building wealth property and portfolio growth.

When Fixed Rates Make Sense for Investment Properties

Fixed rate loans can be particularly valuable for property investors when:

• You want certainty around your rental income requirements and expenses
• You believe interest rates are likely to rise
• Your property investment strategy doesn't involve making large extra repayments
• You're managing multiple properties and want predictable cash flow
• You're maximising negative gearing benefits and want consistent deductions

Working With Multiple Investment Loan Options

At LBK Lending, we can access investment loan options from banks and lenders across Australia. This means we're not limited to just one lender's investment loan products - we can compare features, investor interest rates, and structures to find what suits your situation.

Different lenders offer varying:

• Investor deposit requirements and loan to value ratio (LVR) options
• Interest rate discounts and rate discount structures
• Annual extra repayment limits on fixed rates
• Flexibility around refinancing when your fixed term ends
• Approaches to Lenders Mortgage Insurance (LMI) for higher LVR loans

Questions to Ask Before Fixing Your Investment Loan

Before locking in a fixed interest rate on your rental property loan, consider:

1. How likely am I to receive windfall income that I'd want to put towards this loan?
2. Am I planning to leverage equity or equity release from this property soon?
3. What are the current fixed vs variable interest rate differences?
4. Does my property investment strategy involve active debt reduction or maximising deductions?
5. What happens when my fixed rate expires?

The Investment Loan Application Process

When you're ready to proceed with your investment property finance, the investment loan application involves:

• Assessing your borrowing capacity including rental income and existing commitments
• Considering factors like vacancy rate assumptions, stamp duty, and body corporate fees
• Determining your investor borrowing structure (fixed, variable, or split)
• Evaluating your investment loan refinance options if you have existing properties
• Planning for financial freedom through passive income and strategic portfolio growth

Moving Forward With Your Investment Property Rates

Choosing between fixed and variable rates - and understanding the implications of extra repayments - is just one piece of your property investment puzzle. The right structure depends on your individual circumstances, tax position, and long-term wealth-building goals.

Whether you're a seasoned investor managing multiple properties or just starting your journey in building wealth through property, having the right advice makes all the difference.

Call one of our team or book an appointment at a time that works for you. We'll review your specific situation, explain all available investment loan features, and help structure your finance in a way that supports your property investment goals right here in Cannon Hill and beyond.