The Pros and Cons of Fixed Rate Investment Loans

A fixed rate investment loan locks your interest rate for a set period, protecting you from rate rises while you build rental income.

Property investors in Double Bay face a distinct challenge. Median rental yields sit below 3 per cent across most apartment stock near the harbour, which means rental income rarely covers loan repayments in the early years. Locking a rate gives you certainty over cash flow when you're holding an asset that produces passive income but requires careful budgeting. The question is whether that certainty is worth the cost, particularly when new tax changes from July 2027 will limit how you can use rental losses.

Why Property Investors Choose Fixed Rates

Fixed rates let you plan cash flow with confidence, which matters when you're holding an asset that produces rental income below the loan repayment.

Consider a buyer who purchases a two-bedroom apartment near Double Bay village with a 20 per cent deposit. At current variable rates, the loan repayment on an interest-only basis would sit around a certain monthly figure, while the rental income might cover only part of that amount. The shortfall is predictable, but only if the rate doesn't move. A fixed rate removes that variable for one to five years, depending on the term you select. That certainty is valuable when you're carrying a property that won't turn cash flow positive for several years, and you're relying on capital growth and tax deductions to make the investment work.

Most lenders offer fixed periods from one to five years on investment loans, with three-year terms being the most common choice. The rate you lock today applies regardless of whether the Reserve Bank cuts or raises the cash rate during that period. If rates rise, you're protected. If they fall, you're locked in.

The Cost of Breaking a Fixed Rate Early

Breaking a fixed rate investment loan before the term ends typically incurs a break cost, which can run into thousands of dollars depending on rate movements and the remaining term.

Break costs are calculated using the difference between your fixed rate and the lender's current wholesale funding cost for the remaining period. If rates have fallen since you locked in, the lender has lost the opportunity to lend that money at the higher rate, and you pay the difference. In a scenario like this, an investor with three years remaining on a fixed term and a loan amount of several hundred thousand dollars could face a break cost in the mid five figures if rates have dropped significantly. If rates have risen, the break cost is usually nil because the lender can re-lend at a higher rate.

This matters for Double Bay investors who may want to access equity as property values rise. If you need to refinance your investment loan or release equity to fund a second purchase, breaking the fixed term can eliminate the financial benefit of the rate lock. Some lenders allow partial switches from fixed to variable or additional drawdowns without breaking the entire facility, but these features vary by product.

Variable Rates and Offset Accounts

Most fixed rate investment loans don't allow offset accounts, which means you lose the ability to reduce interest by parking surplus cash against the loan.

An offset account linked to a variable rate loan lets you deposit rental income, salary or savings and reduce the balance on which interest is calculated. For an investor holding surplus cash between rental payments and expenses, that facility can save hundreds of dollars per month in interest. Fixed rate products rarely offer this feature, so you'll be paying interest on the full loan balance for the entire fixed term even if you have cash sitting in a separate account.

This trade-off is more pronounced for Double Bay investors who might hold large cash reserves or receive rental income in advance. If you're locking a rate to protect against rises but losing offset access, calculate whether the rate difference justifies the loss of flexibility. Some lenders offer split loans, where you fix part of the loan and keep the remainder variable with offset access, allowing you to balance certainty with liquidity.

How the New Tax Rules Affect Fixed Rate Decisions

From July 2027, rental losses on most residential investment properties purchased after May 2026 can only be offset against other rental income, not salary or wages, which changes the value of rate certainty.

Under the previous rules, investors could claim the full rental loss against their taxable income each year, which meant a higher tax refund and improved cash flow. The new quarantine rules mean that rental losses on affected properties must be carried forward and used only against future rental income or capital gains when you sell. If you're holding a Double Bay apartment that produces a rental loss, you no longer receive the immediate tax benefit that once softened the cash flow burden.

Fixed rates still protect you from payment increases, but the cash flow gap is now harder to manage because you can't offset the loss against your salary. This makes it more important to model your holding costs over the fixed term and ensure you can service the loan without relying on a tax refund. Properties purchased before May 2026 are grandfathered under the old rules, so the fixed versus variable decision depends partly on when you bought and whether you still have access to traditional negative gearing.

Interest Only Versus Principal and Interest

Most property investors choose interest-only repayments to minimise cash outflow and maximise tax deductions, and fixed rates are available on both structures.

An interest-only loan on an investment property means your repayment covers only the interest component, keeping the loan balance unchanged. This structure reduces your monthly payment and maximises the deductible interest expense, which is why it's widely used by investors focused on capital growth rather than debt reduction. Fixed rates are available on interest-only terms, typically for up to five years, after which the loan either reverts to principal and interest or can be renegotiated.

In Double Bay, where rental yields are low and investors are holding for long-term capital growth, interest-only terms let you carry the property without the added burden of principal repayments. The fixed rate adds certainty to that cash flow. Once the interest-only period ends, your repayment will increase significantly if you move to principal and interest, so it's worth planning for that transition before you lock the rate.

Rate Discounts and Loan to Value Ratios

The rate you're offered on a fixed investment loan depends partly on your deposit size, with lenders offering deeper discounts to borrowers with lower loan to value ratios.

If you're borrowing at 80 per cent LVR or below, you'll typically access a lower rate than someone borrowing at 90 per cent with Lenders Mortgage Insurance. The difference can be several basis points, which compounds over the life of the loan. For Double Bay investors purchasing with a larger deposit, this makes fixed rates more attractive because the rate you lock is already discounted. If you're refinancing and you've built equity through capital growth, your LVR will have improved, and you may qualify for a lower fixed rate than you could have accessed at purchase.

Some lenders also offer additional discounts if you hold other products with them, such as transaction accounts or offset facilities on other loans. These discounts are negotiable and vary by lender, so it's worth comparing the effective rate after all adjustments rather than the headline figure.

Flexibility to Repay Extra or Access Equity

Fixed rate loans typically limit additional repayments and restrict your ability to redraw or access equity during the fixed term.

Most lenders cap extra repayments on fixed rate investment loans at around ten to twenty thousand dollars per year without incurring a break cost. If you come into surplus cash and want to reduce the loan balance, you'll either be capped or charged for the privilege. Redraw facilities, which let you access additional repayments you've made, are often unavailable or restricted on fixed products. This makes fixed rates less suitable for investors who want the option to release equity or adjust their loan structure as their circumstances change.

For Double Bay investors holding multiple properties or planning to expand their portfolio, this lack of flexibility can be a constraint. If you're fixing the rate on one property and expecting to use equity from that property to fund a second purchase, confirm whether the lender allows equity access during the fixed term or whether you'll need to break the loan.

Call one of our team or book an appointment at a time that works for you. We'll compare fixed and variable investment loan options from lenders across Australia and structure a loan that fits your property strategy and cash flow.

Frequently Asked Questions