The Pros and Cons of Fixed Rate Investment Loans

A fixed rate investment loan gives you a repayment you can plan around, but it can limit what you do with the loan along the way.

If you are weighing up a fixed interest rate for your next purchase or an existing property, this article covers what you gain, what you give up, and the questions to ask before you lock anything in. We are a Brisbane mortgage broker, so we will keep it practical and honest.

What Is a Fixed Rate Investment Loan?

A fixed rate investment loan holds your interest rate at a set level for an agreed period, so your repayments stay the same during that time. When the fixed period ends, the loan moves to a variable rate or you choose a new fixed term.

You can fix the whole loan or only part of it. Our investment loans page explains the wider range of structures, and each lender sets its own fixed terms and rules.

Fixed Rate Investment Loan Benefits: Repayment Certainty

The main benefit of fixing is certainty. You know your repayment for the whole fixed term, even if variable rates rise.

As an example, consider an investor with a $600,000 loan who fixes at an illustrative 6.75% p.a. on an interest-only basis. Interest-only repayments would be about $3,375 a month. The investor builds the budget around that figure and knows the rent, less other holding costs, covers it with a set buffer.

Now say the loan has a five-year interest-only period, with a 30-year term overall. When principal and interest starts, repayments are worked out over the remaining 25 years. At the same illustrative 6.75% p.a., that is about $4,145 a month, roughly $770 more. The investor knows this jump is coming and plans for it years ahead, rather than being surprised. The trade-off is that if variable rates fall, the investor keeps paying the fixed rate.

Fixed Rate Break Costs: What Happens If You Exit Early

If you sell, refinance or pay off a fixed loan before the term ends, your lender may charge a break cost. The way it is calculated differs between lenders, so ask for the method in writing before you sign.

This matters for investors because plans change. You might sell the property, want to release equity, or find that a refinance suits you more. Any of these can trigger a charge on a fixed loan. If there is a real chance you will sell or restructure within the fixed term, a shorter term or a split loan may suit you more.

Fixed Rate Loan Features: What You May Give Up

Fixed loans often come with fewer features than variable loans, but this depends on the lender and the product. Check each one before you commit.

The questions worth asking are:

• Can you make extra repayments, and is there a limit?
• Is an offset account available on the fixed portion?
• Can you redraw money you have paid ahead?

If you want a full offset account to build up cash, a fully fixed loan may not give you that. The answer is different for each lender, which is why comparing the product terms matters as much as comparing the rate.

Fixed or Variable Rate: Is a Split Loan Worth Considering?

A split loan divides your borrowing between a fixed portion and a variable portion, so you get some certainty and some flexibility. Whether that suits you depends on how you plan to use the loan.

For example, you might fix the portion you expect to hold for years and leave a smaller portion variable, so you can make extra repayments or use an offset on that part. The cost is that you do not get full certainty on the whole loan, and you may be managing two sets of rules. Lenders differ on whether they allow offsets, extra repayments or transfers between the portions, so ask about each one.

How Fixing Your Rate Affects Borrowing and Tax

Fixing your rate does not give you a higher borrowing amount. For banks, APRA requires lenders to assess new borrowers at an interest rate at least 3 percentage points above the loan's product rate, so the assessment rate is higher than your fixed rate. You can read more about how lenders work this out on our borrowing capacity page.

On tax, interest on money borrowed to buy or hold a rental property is generally deductible to the extent the property is rented or available for rent. Only the interest part of a principal and interest repayment is deductible, not the principal. Rules on negative gearing and capital gains tax have changed recently, so speak with your accountant about how they apply to your situation before making a decision.

What Happens When Your Fixed Term Ends?

When a fixed term ends, your loan usually reverts to the lender's variable rate unless you choose a new option. That rate can be higher than you were paying, so it pays to plan before the end date arrives.

It is worth reviewing your loan a few months before expiry. You can compare other lenders, ask your current lender for a new fixed term, or switch to variable. Our fixed rate expiry page covers your choices, and a loan health check can show whether your current structure still suits your goals. Note that refinancing may involve discharge, valuation or other fees, so we weigh those up with you first.

Is a Fixed Rate Right for Your Investment?

Fixing tends to suit investors who value predictable repayments and do not expect to sell, refinance or make large extra repayments during the term. It tends to suit them less if flexibility matters more than certainty.

We can access loan options from banks and lenders across Australia, so we can compare fixed terms, features and break cost methods side by side. Call one of our team or book an appointment at a time that works for you, and we will talk through what makes sense for your plans.

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