Top tips to lock in rates on investment loans

Fixed rates give you repayment certainty while your tenant stays

A fixed rate locks your interest rate for a set period, usually one to five years. Your repayments stay the same regardless of what happens with the Reserve Bank or your lender's variable rate. That matters most when you're relying on rental income to cover your mortgage.

Consider an investor who bought a two-bedroom apartment in Surry Hills, borrowed at a fixed rate for three years, and immediately secured a tenant on a 12-month lease. The tenant renewed twice. For those three years, the investor's repayments stayed identical while variable rates moved up and down. Budgeting became predictable. The rental income covered the mortgage, and there were no surprises when rates spiked halfway through the fixed term.

That certainty ends when the fixed period does. At that point, most investment loans revert to a variable rate unless you refinance or fix again. You need a plan for what happens at expiry, not just a decision about whether to fix now.

Interest-only repayments keep your monthly costs lower

Most fixed rate investment loans let you choose interest-only repayments for part or all of the fixed term. You pay only the interest each month, not the principal. Your loan balance stays the same, but your monthly outgoing drops compared to principal-and-interest repayments.

An investor borrowing for a Surry Hills unit might fix the rate for three years and take interest-only repayments for that same period. If the loan amount sits around the area median and rental yield covers the interest, the investor's cash flow stays positive. Once the interest-only period ends, the loan typically switches to principal and interest, and repayments increase.

Interest-only periods on fixed loans usually run between one and five years. Some lenders restrict interest-only to a maximum term regardless of your equity position. Others allow longer periods if your loan-to-value ratio sits below 80 per cent. The interest-only term doesn't always match the fixed rate term, so you might fix for five years but only get interest-only approval for three.

Portability lets you keep the rate when you sell and buy again

Portability means you can move your fixed rate loan from one property to another without breaking the fixed term or paying break costs. You sell your current investment property, use the proceeds to buy a different one, and the loan shifts across with the same rate and remaining fixed period.

Not all lenders offer portability, and those that do often attach conditions. The new property must settle within a set window, usually 30 to 90 days after the old property sells. The loan amount usually can't increase beyond a small margin, often 5 or 10 per cent, without triggering a partial break cost on the extra borrowing. If you're upgrading from a one-bedroom apartment in Surry Hills to a larger property and need to borrow more, portability might only cover the original loan amount.

Portability works when your investment strategy involves moving between properties of similar value rather than building a portfolio by keeping what you own and adding more. It's most useful in a rising rate environment where your fixed rate sits well below current market rates.

Additional repayments during the fixed term usually come with a cap

Most fixed rate investment loans allow you to make extra repayments up to a set limit each year, commonly between ten and thirty thousand dollars, without penalty. Anything above that limit attracts a break cost.

The cap resets each year on the anniversary of your loan settlement, not each calendar or financial year. If your fixed term runs for three years and the cap is twenty thousand per year, you can pay an extra sixty thousand over the full term as long as you stay within twenty thousand in any 12-month period.

Extra repayments on a fixed interest-only loan usually sit in a separate account and don't reduce your loan balance until the interest-only period ends. Some lenders let you redraw those extra payments during the fixed term. Others hold them as a non-accessible balance until the loan converts to principal and interest or the fixed term expires.

Offset accounts rarely work with fixed rate investment loans

Fixed rate loans typically don't allow offset accounts. A few lenders offer partial offset on fixed loans, where the offset benefit applies to only a portion of your balance, but that's uncommon on investor products.

Without an offset, any surplus cash you want to put toward your investment property finance either goes into the loan as an extra repayment, up to the annual cap, or sits in a separate savings account earning interest. That interest becomes assessable income, which reduces its value if you're already in a higher tax bracket.

For Surry Hills investors who keep large cash reserves or who receive lump sums during the year, a split loan structure often makes more sense than fixing the entire amount. You fix part of the loan for rate certainty and leave part on a variable rate with a full offset account. The variable portion gives you somewhere to park surplus funds and reduce interest in real time without hitting repayment caps.

Break costs apply if you repay the fixed loan early

If you pay out your fixed rate loan before the fixed term ends, most lenders charge a break cost, also called an economic cost or early repayment adjustment. The cost compensates the lender for the difference between the rate you're paying and the rate the lender can now earn by lending that money elsewhere.

Break costs are highest when market rates have fallen since you fixed. If you locked in a rate and rates dropped soon after, the lender loses income by letting you out of the contract early. If rates have risen, the break cost is usually zero or very small, because the lender can now lend at a higher rate than the one you were paying.

You'll trigger a break cost if you sell the property and pay out the loan, if you refinance to another lender, or if you pay down more than the annual extra repayment cap. Portability avoids the cost only if you meet the lender's conditions. Break costs can run into tens of thousands of dollars depending on the loan amount, remaining fixed term, and how far rates have moved.

Splitting your loan gives you both certainty and flexibility

A split loan divides your borrowing into two or more portions, each with its own rate type, repayment structure, and features. You might fix 60 per cent of the loan and leave 40 per cent variable, or split it three ways with different fixed terms on each portion.

Splitting lets you lock in part of your repayment while keeping access to features like offset accounts, unlimited extra repayments, and penalty-free refinancing on the variable portion. If you need to sell or refinance before the fixed term ends, you'll only pay break costs on the fixed portion, and only if rates have moved against you.

For an investor buying in Surry Hills, a split structure might mean fixing half the loan for three years at interest-only to match a tenant's likely occupancy, and keeping the other half variable with an offset account to manage tax and cash flow. When the fixed portion expires, you can re-fix it, switch it to variable, or adjust the split based on what rates and your circumstances look like at that time. Split loans require separate loan accounts, and some lenders charge a small ongoing fee for each additional account.

If you're weighing up whether to fix part or all of your investment loan, or if your current fixed term is coming to an end and you're not sure what to do next, call one of our team or book an appointment at a time that works for you. We'll walk through your options with lenders across Australia and help you set up a loan structure that fits how you're actually using the property.

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