Fixed Rate Investment Loans: What Not to Lock In

Fixed Rates Give Certainty, Not Flexibility

A fixed rate on an investment loan protects your repayments from rate rises, but it also locks you into a contract that can cost thousands to exit early. Break costs, limited extra repayments, and restrictions on refinancing are standard features on most fixed rate investment products. If your investment strategy depends on flexibility, a fixed rate might work against you.

Consider a property investor who fixes a $600,000 loan at 5.79 per cent for three years, then needs to sell the property 18 months later because tenants leave and the vacancy drags on. The lender calculates break costs based on the difference between the fixed rate and the current wholesale rate, multiplied across the remaining term. If wholesale rates have dropped, the break cost could sit anywhere from $8,000 to $18,000. That's on top of selling costs and any shortfall from a lower sale price.

Fixed rates work when your holding period is certain and you don't need to touch the loan structure. If that's not your situation, the certainty comes at a cost.

What Break Costs Actually Are

Break costs are the lender's way of recovering the loss they take when you exit a fixed rate early. When you lock in a rate, the lender funds that loan at a wholesale rate for the agreed term. If you break the contract, they're left with money they can't re-lend at the same return. The break cost covers that gap.

The formula looks at the difference between your fixed rate and the current wholesale rate for the remaining term, then applies it to your outstanding balance. If rates have risen since you fixed, the break cost is often zero because the lender can re-lend at a higher rate. If rates have fallen, you pay the difference.

Lenders don't always explain this upfront. Some investors assume break costs are a flat fee or penalty. They're not. They're a calculation, and they can shift depending on market conditions at the time you want to exit.

Extra Repayments Are Capped or Blocked

Most fixed rate investment loans allow between $10,000 and $30,000 in extra repayments per year. Anything beyond that triggers break costs. If you're planning to use surplus rental income or a bonus to pay down the loan faster, a fixed rate will stop you.

Variable rate loans let you throw as much at the loan as you want without penalty. If your investment strategy includes paying down debt quickly to build equity for the next purchase, fixing the rate removes that option.

Some lenders offer partial fixes, where you split the loan between fixed and variable. That gives you the option to make extra repayments on the variable portion while keeping some rate protection on the fixed side. It's a middle ground, but it requires you to think through how much flexibility you actually need before you commit.

You Can't Refinance Without Breaking the Fixed Term

If rates drop or a better loan product becomes available, refinancing a fixed rate loan means paying break costs to exit. That often wipes out any benefit you'd gain from moving to a lower rate.

In our experience, investors who fixed during the rate rise cycle in late 2024 are now sitting on loans that are 80 to 100 basis points above current fixed rates. They want to refinance, but the break costs sit between $12,000 and $25,000 depending on the remaining term. Unless they're holding the loan for another few years and can absorb the cost over time, refinancing doesn't make financial sense.

If you're considering a fixed rate, assume you're locked in for the full term. If your circumstances or the market might shift, refinancing later could become expensive or impossible.

Access to Equity Is Limited on Fixed Loans

Most lenders won't let you increase a fixed rate loan to access equity without breaking the contract. If property values rise and you want to pull equity out for a deposit on the next purchase, you'll either need to refinance the whole loan or wait until the fixed term ends.

Variable rate loans allow you to top up the loan or apply for equity release without penalty. For investors building a portfolio, that flexibility matters. Locking in a rate can delay your next move by two to three years unless you're prepared to pay break costs or carry a separate variable loan for equity access.

Some lenders offer split loans where the variable portion can be increased independently. That structure works if you plan ahead, but it's not standard across all investment loan products.

Interest-Only Periods Run Independently of the Fixed Term

A common assumption is that fixing the rate also locks in the interest-only period. It doesn't. The interest-only term is a separate feature, and it can expire before the fixed rate does.

As an example, an investor fixes a loan for three years with a five-year interest-only period. After five years, the loan converts to principal and interest repayments, but the fixed rate still has time to run. The repayments jump, and the investor can't refinance to extend the interest-only term without paying break costs.

If you're fixing the rate on an investment loan, check when the interest-only period ends and make sure it aligns with the fixed term. If it doesn't, you need to know what the principal and interest repayments will look like once the interest-only period rolls off.

Fixed Rates Don't Respond to APRA or Market Shifts

APRA's serviceability buffer and debt-to-income limits apply at the time of application, but once you've locked in a fixed rate, your repayments don't change even if the market does. That sounds like an advantage, but it also means you can't take advantage of rate cuts if they happen during your fixed term.

Variable rates move with the cash rate and lender pricing decisions. If rates drop, your repayments drop. If they rise, you pay more. Fixed rates don't move at all. You're betting that rates will either stay flat or rise during your fixed term. If they fall, you're paying more than you need to and you can't exit without penalty.

For investors holding property through a volatile rate cycle, that trade-off is worth considering. Fixed rates remove downside risk, but they also remove upside opportunity.

Portability Is Rare on Fixed Rate Investment Loans

If you sell the investment property and want to transfer the fixed rate loan to a new property, most lenders won't allow it. Portability is more common on owner-occupier loans, but even then it's not standard. For investment loans, selling the property usually means discharging the loan and paying break costs if you're still within the fixed term.

Some non-bank lenders offer portable fixed rates, but the property needs to settle within a short window and the loan amount usually can't change. If you're selling a $500,000 property and buying a $700,000 replacement, you'll need a new loan for the difference, and the fixed rate won't transfer cleanly.

If your investment strategy involves selling and upgrading within a few years, a fixed rate adds friction. You're locking in a loan structure that assumes you'll hold the same property for the full term.

Split Loans Give You Both Rate Protection and Flexibility

Splitting your investment loan between fixed and variable gives you partial rate protection without losing all flexibility. A common split is 50/50 or 60/40 in favour of the fixed portion, depending on how much certainty you want versus how much access to features like extra repayments or equity release.

The variable portion can be used for extra repayments, refinancing, or topping up for equity access without triggering break costs. The fixed portion protects you from rate rises on the majority of the loan. It's not as clean as going fully fixed or fully variable, but it's a practical middle ground for investors who need both.

Not all lenders offer splits, and some charge separate fees for each portion. If you're considering a split structure, ask your broker to compare products that allow it without doubling up on account-keeping fees or application charges. We regularly see investors save $400 to $800 per year by choosing a lender that treats a split loan as a single facility rather than two separate accounts.

When a Fixed Rate Actually Works for Property Investors

Fixed rates suit investors who are holding long-term, don't need to access equity, and want certainty over repayments for budgeting. If you've just bought a property, the tenants are locked in on a long lease, and you're not planning another purchase for three to five years, fixing the rate removes one variable from your cashflow.

They also work if you're borrowing at a high loan-to-value ratio and can't afford repayment increases. Locking in the rate means you know exactly what the repayments will be for the fixed term, and you can plan around that.

But if your strategy depends on flexibility, access to equity, or the ability to refinance, a fixed rate will cost you more than it saves. Most investors underestimate how often their circumstances change. A fixed rate assumes nothing will shift for two to five years. That's a long time in property investment.

If you're weighing up whether to fix or stay variable on your investment loan, call one of our team or book an appointment at a time that works for you. We'll run the numbers based on your actual strategy, not just the rate on the page.

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