Fixed Rate Investment Loans: Lock Your Costs or Split?

Locking in a fixed rate on an investment property loan protects your rental cashflow from rate rises.

The question is how long to fix for. A five-year fixed term might offer protection, but it also locks you in if rates drop or your investment strategy changes. Most property investors who fix their rate choose terms between one and three years, allowing them to benefit from rate certainty without committing to a full decade of inflexibility. The right choice depends on what you expect from the market, how much rental income you need to cover repayments, and whether you plan to refinance your investment loan or sell within that timeframe.

How Fixed Rate Terms Work for Investment Property Finance

A fixed rate loan means your interest rate stays the same for an agreed period, typically between one and five years. During that period, your repayments remain predictable regardless of what happens to the cash rate. Once the fixed period ends, your loan reverts to a variable rate unless you renegotiate.

For investors relying on rental income to cover repayments, this certainty can be valuable. Consider someone purchasing a unit in Halls Head for $450,000 with a 20% deposit. If they fix their rate at the start of the loan, they know exactly what their repayment will be each month, making it simpler to calculate whether the rental income covers their costs or whether negative gearing will apply. If rates climb during the fixed period, they avoid the repayment increase that variable rate borrowers face.

The downside is rigidity. If you fix for five years and decide to sell the property in year three, you may face break costs, which are fees charged by the lender to exit the fixed rate early. These can run into thousands of dollars depending on how much rates have shifted since you locked in. This is particularly relevant for investors in growth areas like Mandurah, where property values can shift quickly and selling opportunities arise.

Choosing a Fixed Rate Term That Matches Your Investment Strategy

Your fixed rate term should align with how long you intend to hold the property and what you expect from the market. Shorter fixed terms offer more flexibility. Longer terms offer more certainty but less room to adapt.

In our experience, investors who plan to build wealth through portfolio growth often prefer one or two-year fixed terms. This allows them to lock in protection against short-term rate rises while keeping the option to refinance, access equity, or adjust their borrowing capacity as the portfolio grows. Investors focused on passive income over the long term might prefer longer fixed periods, particularly if they believe rates will rise and want to secure predictable repayments.

Mandurah's rental market has seen demand shift over recent years, driven by affordability for renters relocating from Perth and a growing retiree population. If you purchase an investment property in Falcon or Greenfields, your vacancy rate and rental income might be more stable than in areas with higher turnover. A longer fixed term could suit that scenario, as your cashflow is less likely to fluctuate.

Split Rate Loans: Fixing Part and Keeping Part Flexible

A split rate loan divides your loan amount into two portions. One portion is fixed, the other remains variable. This approach gives you some protection from rate rises while keeping flexibility to make extra repayments or redraw on the variable portion without penalty.

As an example, someone borrowing $400,000 to purchase a rental property in Meadow Springs might fix $250,000 for three years and leave $150,000 on a variable rate. If rates rise, the fixed portion protects part of their repayment. If rates fall, the variable portion drops with them. If they receive a bonus or rental income exceeds expectations, they can make extra repayments on the variable portion without triggering break costs.

This structure works well for investors who want certainty but anticipate changes to their financial situation, such as selling another property, leveraging equity, or paying down debt faster than the minimum term. It also suits those who are unsure about rate movements and prefer to hedge rather than commit fully in one direction.

What Happens When Your Fixed Rate Term Ends

At the end of your fixed period, your loan automatically converts to the lender's standard variable rate unless you take action. That standard variable rate is usually higher than the discounted variable rates available to new borrowers, which means your repayments can jump unexpectedly.

This is when many investors choose to refinance or renegotiate. If you have held the property for a few years and its value has increased, you may have built equity that allows you to negotiate a lower rate or access funds for another investment. Alternatively, you could fix again for another term if you believe rates will continue to rise. Investors who are approaching the end of a fixed term should review their options at least three months before the fixed rate expiry date to avoid rolling onto a higher rate by default.

For Mandurah investors, property values in suburbs like Lakelands and Coodanup have shifted over recent years. If you purchased during a growth phase, your loan to value ratio may have improved, giving you more options when your fixed term ends.

Tax Deductions and Fixed Rate Investment Loans

Interest charged on an investment loan is tax-deductible, whether the loan is fixed or variable. However, break costs incurred when exiting a fixed rate early are also deductible in the year they are charged, which can soften the financial impact if you need to sell or refinance before the term ends.

Investors who structure their loans as interest-only during the fixed period can maximise their tax deductions by keeping the loan balance high and reducing their upfront repayment amounts. This frees up cashflow for other investments or portfolio growth. Once the interest-only period ends, the loan typically converts to principal and interest, which increases the repayment but also starts reducing the debt.

It is worth noting that interest-only terms on investment loans are usually shorter than they used to be, with most lenders offering between one and five years. If you choose a five-year fixed rate with a five-year interest-only period, you lock in both the rate and the repayment structure for the full term, which offers maximum predictability but minimum flexibility.

When Not to Fix Your Investment Loan

Fixed rates are not always the right choice. If you expect to sell the property within a year or two, the cost of breaking a fixed loan early could outweigh the benefit of rate certainty. If you plan to make large additional repayments or pay the loan off quickly, a variable rate offers more flexibility without penalty.

Investors who are uncertain about their strategy or who may need to access equity soon should think carefully before locking in. A variable rate allows you to redraw funds, make unlimited extra repayments, and refinance without restriction. If your investment plan involves using equity from one property to fund another, or if you expect a windfall that could reduce your debt quickly, a variable loan may serve you better.

Down to Earth Mortgage Broking works with property investors across Mandurah and greater Perth to match loan features with investment goals. Call one of our team or book an appointment at a time that works for you.

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