How to Handle Extra Repayments on Fixed 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 frequently is whether you can make extra repayments on a fixed rate investment loan, and whether you should.

Let's explore the relationship between fixed interest rates and extra repayments, and how this impacts your property investment strategy.

Understanding Fixed Rate Investment Loans

When you're buying an investment property, you'll typically choose between a variable rate or fixed rate loan. A fixed interest rate means your investor interest rates remain unchanged for a set period, usually between one to five years. This provides certainty when calculating investment loan repayments and helps with budgeting your investment property finance.

Many property investors choose fixed rates to protect themselves against potential rate increases and to maintain predictable cash flow alongside their rental income. However, this certainty comes with certain conditions, particularly around making extra repayments.

The Extra Repayments Dilemma

Here's where things get interesting for Cannon Hill investors. Most fixed rate investment loan products have restrictions on extra repayments. Typically, lenders allow you to make additional repayments of up to $10,000 to $30,000 per year during the fixed period, though this varies between banks and lenders across Australia.

If you exceed these limits, you may face break costs or early repayment fees. These fees compensate the lender for the interest they expected to receive over the fixed term.

Why the restrictions? When you lock in a fixed rate, the lender secures funding at that rate. If you pay off a large portion early, they lose the anticipated interest income and may face their own costs.

Investment Loan Features to Consider

When assessing investment loan options, consider these investment loan features:

1. Annual extra repayment limits - How much can you pay extra each year without penalties?
2. Offset account availability - Some fixed loans don't offer offset accounts
3. Interest only vs principal and interest - Interest only investment loans are common for maximising tax deductions
4. Split loan options - Combining fixed and variable portions for flexibility

Should You Make Extra Repayments on Investment Loans?

This depends on your property investment strategy and circumstances. For many Cannon Hill investors, the answer might surprise you.

Tax considerations: Investment property loans often provide negative gearing benefits. The interest you pay is among the claimable expenses that help maximise tax deductions. Making extra repayments reduces your loan amount, which means less interest to claim as a tax deduction.

Cash flow management: Keeping funds in an offset account (if available on your variable portion) or other investments might provide more flexibility than locking money away by reducing your investment loan amount.

Portfolio growth: Some property investors prefer to maintain their borrowing capacity and use available funds for additional property purchases rather than paying down existing debt. This approach focuses on leverage equity for building wealth property over time.

When Extra Repayments Make Sense

There are situations where making extra repayments on your fixed rate investment loan could work well:

• You're approaching a loan to value ratio (LVR) threshold that would eliminate Lenders Mortgage Insurance (LMI) on your next investment loan refinance
• You're planning an equity release for your next property purchase
• Your rental income exceeds expectations and you want to reduce debt
• You're nearing retirement and want to reduce overall debt levels
• You're within the penalty-free extra repayment limit

Variable Rate Alternatives

If making regular extra repayments is important to your strategy, a variable interest rate might suit you better. Variable rate loans typically offer:

• Unlimited extra repayments without penalties
• Offset account facilities to reduce interest while maintaining access to funds
• Redraw facilities for accessing funds you've paid ahead
• More flexibility as your circumstances change

You can also consider splitting your investment loan between fixed and variable portions, giving you both stability and flexibility.

Planning Your Investment Property Finance

When completing your investment loan application, think about:

• Your intended property investment strategy over the next 5-10 years
• Whether you'll need rental income to cover all costs or you're comfortable with negative gearing benefits
• Your investor deposit and how it affects your loan to value ratio (LVR)
• Potential vacancy rate periods and maintaining cash reserves
• Stamp duty, body corporate fees, and other claimable expenses
• Your long-term goals for financial freedom and passive income

Accessing the Right Investment Loan Products

At LBK Lending, we help Cannon Hill investors access investment loan options from banks and lenders across Australia. Every property investor loan situation is different, and what works for one investor may not suit another.

Whether you're looking at interest only investment loans, principal and interest repayments, or exploring investment property rates, understanding the investment loan benefits and limitations of each option helps you make informed decisions.

We can help you compare investment loan interest rates, work through calculating investment loan repayments, and understand how different investment loan features align with your goals. If you already have investment property finance in place, a loan health check can identify whether your current structure still serves your needs.

The right rental property loan structure depends on your individual circumstances, tax position, and investment goals. Don't let fixed rate restrictions catch you by surprise.

Call one of our team or book an appointment at a time that works for you to discuss your investment property finance options.