The Pros and Cons of Fixed Rate Investment Loans

A fixed rate investment loan gives you repayment certainty, but it can cost you if you need to leave the loan early.

If you are buying or refinancing a rental near Batemans Bay on the NSW South Coast, the fixed rate decision is mostly about fees and flexibility. The interest rate is only part of it. This article walks through the costs to look for so you can decide with confidence.

What Fees Come With a Fixed Rate Investment Loan?

A fixed rate investment loan can carry the same kinds of fees as any other loan, such as application, valuation, ongoing package and discharge fees, and the amounts depend on the lender. Some lenders waive certain fees, so it is worth comparing the full cost rather than just the headline rate.

Fixed loans can also come with limits on features. Some lenders cap extra repayments during the fixed term, and some do not allow an offset account or redraw on a fixed portion. These rules are set by each lender, so check the product terms before you commit.

Your broker can compare investment loan products from the lenders on their panel and point out which fees and limits apply to each one.

Fixed Rate Break Costs: What Triggers Them

Break costs can apply when you repay or change a fixed rate loan before the fixed term ends. Each lender uses its own method to calculate them, so the amount can vary a lot between lenders.

Things that can trigger a break cost include:

• selling the property during the fixed term
• refinancing to another lender
• paying off more than the lender allows
• switching to a different loan product

The cost generally depends on how much you owe, how long is left on the fixed term, and what has happened to rates since you fixed. Because of this, you cannot know the exact figure when you sign. Ask the lender for a written explanation of how they calculate it, and ask for an estimate before you make any move.

The Pros of Fixing Your Investor Interest Rate

The main benefit of fixing is that your repayments stay the same for the fixed term, which makes budgeting around your rental income more predictable. If variable rates rise during that time, your repayments on the fixed portion do not.

That predictability helps if your rent covers most but not all of your costs. You know what the loan will cost each month, even if you cannot predict vacancies or repairs.

The Cons: What You Give Up With a Fixed Rate

The main downside is reduced flexibility. If variable rates fall, you stay on your fixed rate. If you want to sell, refinance or pay the loan down faster, you may face break costs or repayment limits.

It also helps to know how lenders view your loan. Choosing interest only does not increase your borrowing capacity. Lenders regulated by APRA are expected to assess interest-only loans over the remaining principal and interest term. For example, a 30-year loan with a 5-year interest-only period is assessed over 25 years.

On tax, interest on money borrowed to buy or hold a rental property is generally deductible while the property is rented or genuinely available for rent. Only the interest part of a principal and interest repayment is deductible, not the principal. Speak to your accountant about how this applies to your situation.

Splitting Your Loan: A Batemans Bay Example

Splitting a loan lets you fix part of the debt and keep the rest variable, so only the fixed portion carries break cost risk. The trade-off is that the variable portion can rise if rates rise.

As an example, consider an investor buying a rental in Batemans Bay with a $500,000 loan. They fix $300,000 on interest only and keep $200,000 variable on principal and interest over 30 years. For this illustration, both portions use an example rate of 6.75% p.a. This is not a current or offered rate.

The fixed portion costs about $1,687.50 a month in interest ($20,250 a year). The variable portion costs about $1,297 a month. Total repayments are about $2,985 a month.

Two years in, the investor decides to sell. Because only $300,000 is fixed, any break cost applies to that portion, not the full $500,000. The variable portion can usually be repaid without that cost, but the investor should confirm this with the lender. They ask the lender for a break cost estimate before listing the property, so they know the figure before they set a sale price.

The cost of this approach is that the fixed portion still has its limits, and the investor carries variable rate risk on the rest. You can test different splits using a repayment calculator before you talk to a broker.

What Happens When Your Fixed Term Ends?

When a fixed term ends, your loan typically moves to a variable rate unless you choose to fix again. The new rate may be higher or lower than your fixed rate, so it pays to plan before the end date.

Our fixed rate expiry page explains your options. You might also consider a refinance to another lender, but check any discharge fees and break costs first, as they apply if you move before the term ends. Your broker can compare these costs against the possible gain.

Frequently Asked Questions