What a Fixed Rate Does on an Investment Loan
A fixed rate locks your repayment amount for a set period, typically between one and five years. During that time, your repayments stay the same regardless of what happens to the Reserve Bank cash rate or lender variable rates.
For property investors in Deanside, where many rental properties are newer builds serving families relocating to the growth corridor, this predictability can help with budgeting rental income and expenses. If your rental income covers 80 per cent of your repayment now, it will continue to cover that same dollar amount until the fixed period ends, even if rates rise elsewhere.
The difference matters during vacancy periods. If your property sits empty for three weeks between tenants, you know exactly what your out-of-pocket cost will be. With a variable rate, that cost could be higher or lower depending on rate movements during the year.
How Fixed Rate Pricing Differs from Variable Rates
Lenders price fixed rates based on what they expect the cash rate to do over the fixed period, not what it is doing today. That means a fixed rate can sit above or below the current variable rate depending on the lender's outlook.
In our experience, investors often assume a lower advertised fixed rate always delivers lower total interest costs. That assumption only holds if rates rise or stay steady during the fixed term. If rates fall, the fixed rate borrower continues paying the higher locked-in rate while variable rate borrowers benefit from the decrease.
Consider an investor who fixed at 5.8 per cent for three years when the variable rate was 6.1 per cent. Six months later, the variable rate dropped to 5.4 per cent. The fixed rate borrower is now paying 0.4 percentage points more than they would on a variable loan, and that gap continues for the remainder of the fixed term.
This is not a flaw in fixed rate products. It reflects the nature of the contract. You are paying for certainty, not necessarily for the lowest possible rate over time. Whether that trade-off suits your circumstances depends on your tolerance for repayment fluctuation and your broader financial position.
Interest-Only Fixed Periods and Cashflow Planning
Most lenders offer investment loans with interest-only repayments during the fixed period. The interest-only term is typically capped at five years, after which the loan converts to principal and interest unless you refinance or negotiate an extension.
Fixing the rate and choosing interest-only repayments at the same time gives you maximum repayment predictability for the fixed period. Your monthly repayment will not change, and you are not required to reduce the loan balance during that time.
For Deanside investors holding newer properties with strong depreciation schedules, this structure can support short-term cashflow while you claim non-cash deductions. The interest component remains fully deductible against rental income, and you retain flexibility to make extra repayments from offset or redraw if your loan permits it.
Once the interest-only period ends, the loan typically reverts to principal and interest, and the repayment increases. If the fixed period and the interest-only period end at the same time, you face two adjustments at once: a new interest rate and a higher repayment structure. Planning for that transition is part of setting up the loan correctly at the start.
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What Happens During a Fixed Period if Your Circumstances Change
Once you lock in a fixed rate, you generally cannot make large extra repayments, switch to a different loan product, or refinance to another lender without triggering break costs. Break costs are calculated based on the difference between your fixed rate and the lender's cost of funds for the remaining fixed term.
If you fixed at 5.8 per cent and wholesale rates have since fallen, the lender is entitled to recover the economic loss they incur by releasing you early. The calculation is opaque and varies between lenders, but break costs can run into thousands of dollars depending on how much time remains and how far rates have moved.
Most lenders allow annual extra repayments up to a set limit, often between ten and twenty thousand dollars, without penalty. Some allow offset accounts against fixed rate investment loans, though this is less common than on variable products. Confirm these features before you commit, particularly if you expect irregular income or plan to sell the property before the fixed term ends.
If your fixed rate loan does not allow offset and you receive a large sum during the fixed period, your options are limited. You can park the funds in a separate savings account and earn interest, though that interest will be taxable. You can make a lump sum repayment up to the annual limit if your loan permits it. Or you can wait until the fixed period ends and pay the funds against the loan at that time.
Splitting Between Fixed and Variable Rates
Many lenders allow you to split your loan between a fixed portion and a variable portion. A common split is 50/50, though you can adjust the ratio to suit your preference.
Splitting gives you some repayment certainty on the fixed portion and full flexibility on the variable portion. You can make unlimited extra repayments against the variable split, access offset or redraw features on that portion, and refinance that portion without break costs if you choose to move lenders.
For an investor in Deanside holding a property with a loan amount above $400,000, splitting might mean fixing $200,000 for three years at a set rate and leaving $200,000 on a variable rate with full offset. Rental income can sit in the offset account and reduce interest on the variable portion, while the fixed portion provides a floor on your repayment obligations.
The trade-off is complexity. You will have two loan accounts, two sets of terms, and two rates to monitor. Some lenders charge separate fees for each split. When the fixed portion expires, you will need to decide whether to refix, convert to variable, or adjust the split ratio. That decision point comes around every few years rather than once at the start.
Fixed Rate Investment Loans and Serviceability Calculations
Lenders assess your ability to service an investment loan by applying a buffer of at least 3.0 percentage points above the loan product rate. That buffer applies regardless of whether you choose a fixed or variable rate.
If you apply for a fixed rate at 5.6 per cent, the lender will assess your capacity to repay at 8.6 per cent or higher. If you apply for a variable rate at 6.0 per cent, the assessment rate will be at least 9.0 per cent. The buffer is set by the Australian Prudential Regulation Authority and applies to all authorised deposit-taking institutions.
Rental income is included in the serviceability calculation, but most lenders apply a haircut to account for vacancy and management costs. A common approach is to include 80 per cent of the expected rental income, though some lenders use different percentages depending on the property type and location.
For an investor borrowing to purchase in Deanside, where rental demand is supported by families and essential workers in the western growth corridor, the vacancy assumption will still apply. The lender does not adjust the serviceability formula based on local occupancy rates. Your actual vacancy experience may be lower than the lender assumes, but the assessment is standardised.
From 1 February 2026, lenders are also required to limit high debt-to-income lending to no more than 20 per cent of new investor loans each quarter. If your total borrowings across all properties and other debts exceed six times your gross annual income, you may be subject to additional scrutiny or decline, even if you meet the serviceability buffer.
Refinancing After a Fixed Period Ends
When your fixed period expires, your loan will automatically revert to the lender's standard variable rate unless you take action. The revert rate is typically higher than the discounted variable rate offered to new customers, sometimes by 0.5 percentage points or more.
This is the point at which many investors refinance to secure a lower rate or access better loan features. If you have built equity in the property and maintained a clean repayment history, you may qualify for a more competitive rate than you could access when you first borrowed.
Refinancing involves a full credit assessment, property valuation, and settlement process. You will need to provide updated income evidence, disclose any changes to your financial position, and pay for a valuation and discharge fees on the old loan. Some lenders offer retention discounts to existing customers approaching fixed rate expiry, which can reduce the need to refinance if the offer is competitive.
If you are approaching the end of a fixed term and are considering your options, it is worth reviewing your loan at least three months before the expiry date. That gives you time to compare offers, arrange valuations, and settle a refinance before the revert rate takes effect. Leaving it until the final weeks limits your choices and increases the risk of rolling onto a higher rate while you wait for settlement.
Call one of our team or book an appointment at a time that works for you to discuss how fixed rate features align with your investment strategy and whether splitting, interest-only terms, or a full variable structure suits your circumstances in Deanside.
Frequently Asked Questions
Can I make extra repayments on a fixed rate investment loan?
Most lenders allow annual extra repayments up to a set limit, often between ten and twenty thousand dollars, without penalty. Making extra repayments beyond that limit during the fixed period may trigger break costs.
What happens to my investment loan when the fixed rate period ends?
Your loan will automatically revert to the lender's standard variable rate, which is typically higher than discounted rates offered to new customers. You can refinance, negotiate a new fixed term, or switch to a discounted variable rate before the expiry date to avoid the revert rate.
How do lenders calculate break costs on a fixed rate investment loan?
Break costs are calculated based on the difference between your fixed rate and the lender's current cost of funds for the remaining fixed term. If wholesale rates have fallen since you fixed, the lender recovers the economic loss by charging a break fee, which can be substantial depending on the time remaining and rate movements.
Can I split my investment loan between fixed and variable rates?
Yes, many lenders allow you to split your loan between a fixed portion and a variable portion. This gives you repayment certainty on the fixed portion while retaining flexibility to make extra repayments and access offset features on the variable portion.
Does fixing my investment loan rate affect how much I can borrow?
No, lenders apply the same serviceability buffer of at least 3.0 percentage points above the loan rate regardless of whether you choose fixed or variable. Your borrowing capacity is determined by your income, expenses, and total debt, not by the rate type you select.
