Understanding Fixed Rate Investment Loans
When you're buying an investment property, choosing between a variable rate and fixed rate loan is one of the most important decisions you'll make. Fixed interest rate loans provide certainty by locking in your investment loan interest rate for a set period, typically between one and five years. This means your repayments remain the same regardless of market fluctuations, making it easier to plan your property investment strategy and calculate investment loan repayments accurately.
For Revesby property investors looking to build wealth through property, understanding the fees and costs associated with fixed rate investment loans is essential. While a fixed rate offers stability and protection against rising interest rates, it comes with specific fees that differ from variable rate products.
Common Fees Associated with Fixed Rate Investment Loans
When you apply for a fixed rate property investment loan, you'll encounter several types of fees that impact the total cost of your investment loan. Being aware of these charges helps you compare investment loan products effectively.
Application and Establishment Fees
Most lenders charge an application fee when you submit your investment loan application. This fee typically ranges from $300 to $1,000 and covers the administrative costs of processing your loan. Some lenders may waive this fee as part of promotional offers or when you're accessing investment loan options from banks and lenders across Australia through a mortgage broker.
Establishment fees, sometimes called setup fees, can range from $500 to $1,500. These cover the cost of setting up your loan account and preparing documentation.
Valuation Fees
Lenders require a professional property valuation to determine the loan to value ratio (LVR) and assess the investment property's worth. Valuation fees typically cost between $200 and $600, depending on the property's location and value. This fee is usually payable upfront, regardless of whether your loan is approved.
Lenders Mortgage Insurance (LMI)
If your investor deposit is less than 20% of the property value, resulting in an LVR above 80%, you'll likely need to pay Lenders Mortgage Insurance. LMI protects the lender if you default on your loan. The cost varies significantly based on your loan amount and LVR, potentially ranging from several thousand to tens of thousands of dollars. However, LMI is considered one of the claimable expenses for property investors and can help with maximise tax deductions.
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Fixed Rate Specific Costs
Fixed rate investment loan products come with unique costs that variable rate loans don't typically have. Understanding these charges is crucial for making an informed decision.
Break Costs
The most significant potential cost with fixed rate loans is break costs, also known as early exit fees or discharge fees. If you repay your loan early, refinance, or make repayments above the allowed limit during the fixed period, you may face substantial break costs. These fees compensate the lender for the interest they lose when you exit the fixed rate contract early.
Break costs are calculated based on the difference between your fixed interest rate and the current market rate, the remaining fixed period, and your outstanding loan amount. In some cases, these fees can reach tens of thousands of dollars, making it important to consider your long-term property investment strategy before committing to a fixed rate.
Limited Flexibility Costs
Fixed rate loans often restrict your ability to make additional repayments. While some lenders allow limited extra repayments (typically $10,000 to $30,000 per year), exceeding this limit triggers break costs. This limitation can impact your ability to reduce your loan amount quickly if your rental income exceeds expectations or you wish to leverage equity for portfolio growth.
Ongoing Fees and Charges
Beyond upfront costs, fixed rate investment loans include ongoing fees that affect your long-term expenses.
Monthly Account Keeping Fees
Many lenders charge monthly account keeping fees, typically between $10 and $15 per month. Over the life of your loan, these fees add up significantly. Some lenders waive these fees for certain investment loan products or when you maintain specific account balances.
Package Fees
Some lenders offer loan packages that bundle your investment property loan with other products, such as offset accounts or transaction accounts. Annual package fees range from $300 to $400 but may provide access to rate discounts and additional investment loan features that offset the cost.
Comparing Fixed and Variable Rate Costs
When evaluating investment loan options, it's worth comparing the cost structures of fixed and variable rate products:
- Variable rate loans typically offer more flexibility with unlimited additional repayments and no break costs
- Variable interest rate products often provide features like offset accounts and redraw facilities at no extra charge
- Interest rate discounts on variable rates may be negotiable, potentially lowering your investor interest rates
- Fixed rates provide certainty but sacrifice flexibility
Many property investors choose a split loan strategy, combining both fixed and variable portions to balance stability with flexibility while managing investment property rates effectively.
Tax Deductibility of Investment Loan Fees
One advantage for property investors is that many fees associated with your rental property loan are tax deductible. Understanding the tax benefits helps reduce your overall investment costs:
Immediately Deductible Fees:
- Loan application fees
- Valuation fees
- Monthly account keeping fees
- Ongoing service charges
Deductible Over Five Years:
- Establishment fees over $100
- Lenders Mortgage Insurance
- Loan discharge costs
These tax deductions contribute to the negative gearing benefits that many investors use to build wealth through property while generating passive income. Combined with other claimable expenses like body corporate fees, property management costs, and depreciation, these deductions reduce your taxable income.
Consult with a tax professional to ensure you're maximising tax deductions and claiming all eligible expenses related to your investment property finance.
Making the Right Decision for Your Investment
Choosing between fixed and variable rate investment loans depends on your individual circumstances, risk tolerance, and property investment strategy. Consider these factors:
- Your ability to absorb interest rate increases if rates rise
- The current interest rate environment and economic forecasts
- Your plans for the property, including potential sale or refinance
- Whether you need rental income flexibility to make additional repayments
- Your overall goals for financial freedom and portfolio growth
A professional mortgage broker can help you access investment loan options from banks and lenders across Australia, comparing investment loan features and calculating investment loan repayments across different products. At WealthStreet Mortgage Brokers, we specialise in helping Revesby property investors understand the complete cost picture of their investment loan refinance options.
Additional Considerations
When evaluating the total cost of your investment property loan, don't overlook these factors:
Stamp Duty: While not a loan fee, stamp duty on your property purchase represents a significant upfront cost that affects your total investment outlay.
Vacancy Rate: Budget for periods when your property may be unoccupied. A higher vacancy rate in your area means you'll need sufficient reserves to cover loan repayments without rental income.
Interest Only vs Principal and Interest: Many investors choose interest only investment loans to maximise cash flow, but this affects your equity position and long-term costs. Principal and interest repayments build equity faster and reduce your overall interest paid.
Understanding these elements helps you make informed decisions about your investor borrowing capacity and long-term investment success.
Fixed rate investment loans offer valuable certainty in your property investment journey, but the associated fees and costs require careful consideration. By understanding these expenses and how they impact your overall investment returns, you can make decisions that align with your wealth-building goals.
If you're considering fixed rate investment loan products or want to explore your investment loan options, our team at WealthStreet Mortgage Brokers is here to help. We can assess your borrowing capacity, compare products from multiple lenders, and find investment loan benefits that suit your circumstances. Call one of our team or book an appointment at a time that works for you to discuss your property investment goals.
