Unlock the Secrets to Fixed Rate Investment Loan Terms

Fixed rate terms on investment loans typically range from one to five years, and the period you choose determines how long your interest rate and repayments remain locked.

Ormeau's investment market continues to attract buyers seeking entry-level properties close to the M1 corridor. The median house price sits within reach of many first-time investors, but serviceability remains the primary constraint. APRA requires lenders to assess your ability to service any new loan at a rate at least 3.0 percentage points above the actual product rate, regardless of whether you choose fixed or variable. That buffer applies to all new borrowing, and it affects how much you can borrow on an investment property more than the rate you ultimately pay.

How Fixed Rate Terms Affect Serviceability and Loan Amounts

A fixed rate term does not change the serviceability assessment, but it does affect the certainty of your cashflow during the fixed period.

Consider an investor who purchases a townhouse in Ormeau and fixes the interest rate for three years. The lender still assesses the application using a rate that is 3.0 percentage points higher than the fixed rate offered. Once approved, the investor pays the fixed rate for three years, meaning the actual repayment amount remains constant during that period. Rental income from the property can be included in the serviceability calculation, though lenders typically discount it by 20 per cent or more to account for vacancy and maintenance costs. The fixed term provides certainty during the holding period, which can be useful for budgeting, but it does not increase the amount you can borrow.

Shorter fixed terms generally attract lower rates than longer terms, though this is not always the case. Lenders price fixed rates based on expectations of future cash rate movements, and the yield curve can invert when rate cuts are anticipated. In our experience, investors who fix for one or two years often do so to lock in certainty while retaining the flexibility to refinance or access equity within a shorter timeframe. Investors who fix for four or five years are typically seeking maximum protection from potential rate rises, though they accept the risk of being locked into a higher rate if the market moves down.

What Happens When Your Fixed Rate Term Ends

When a fixed rate term expires, the loan automatically reverts to the lender's variable rate unless you refinance or negotiate a new fixed term beforehand.

The variable rate your loan reverts to is often higher than the advertised rate for new customers. It may also be higher than the variable rate you would have accessed by refinancing to a different lender. Most lenders allow you to lock in a new fixed rate up to 90 days before the current fixed term expires, though some require you to commit earlier. If you wait until expiry, the loan will revert to variable, and you will need to apply for a new fixed rate or refinance to another lender if you want to secure a lower rate. Refinancing an investment loan before the fixed term expires typically incurs break costs, which are calculated based on the difference between your fixed rate and the lender's current wholesale funding cost for the remaining term.

Fixed Rate Investment Loans and Interest-Only Periods

Fixed rate terms and interest-only periods are separate features, and they do not need to align.

An investor might fix the rate for three years while also selecting a five-year interest-only period. In that scenario, the rate is fixed for the first three years, then reverts to variable for the remaining two years of the interest-only period. The interest-only period then expires, and the loan converts to principal and interest unless the lender agrees to extend it. Some lenders cap interest-only periods at five years for investment loans, while others allow longer terms depending on the borrower's profile and the loan-to-value ratio. Investors who fix the rate and select interest-only repayments are typically focused on minimising cashflow requirements during the fixed period, as interest-only repayments are lower than principal and interest. Once the fixed term ends, the borrower has the option to refinance, fix again, or continue on a variable rate. Once the interest-only period ends, repayments increase significantly because the outstanding loan amount must now be repaid over the remaining loan term.

Break Costs and How They Are Calculated

Break costs apply when you repay a fixed rate loan in full or make a repayment above the permitted threshold before the fixed term expires.

Most lenders allow additional repayments of up to a specified amount during the fixed period without penalty, often in the range of ten to twenty thousand dollars per year. If you refinance, sell the property, or make a lump sum repayment that exceeds the allowable limit, the lender will calculate a break cost based on the economic loss it incurs. The calculation compares the fixed rate on your loan with the rate the lender can now earn by reinvesting the funds for the remaining term. If current rates are lower than your fixed rate, the break cost can be substantial. If current rates are higher, the break cost is typically zero. Break costs are not always transparent at the time of fixing, and they are not capped, so an investor who fixes at a high rate and then attempts to refinance when rates fall may face a material cost to exit.

Choosing a Fixed Term in the Context of Recent Legislative Changes

From the 2027-28 income year, tax deductibility rules for interest on investment property loans are changing for investors who purchase established properties after 12 May 2026.

Investors who purchased property in Ormeau before that date, or who are under contract for settlement before that date, continue to deduct all interest expenses against their total income under the existing negative gearing rules. Investors who purchase established property after 12 May 2026 can only deduct interest and other property-related expenses against income from residential property, including capital gains. Losses can be carried forward. New build properties are exempt from the change, and investors in qualifying new builds retain full negative gearing. The length of the fixed rate term you select has no bearing on the tax treatment of your interest deductions. However, the new rules do affect the after-tax cost of holding the property, which in turn affects serviceability. An investor who cannot deduct interest losses against wage income will have a higher taxable income, and that may reduce the attractiveness of a longer fixed term if the investor expects to sell the property or refinance within a few years. The changes do not apply until the 2027-28 income year, so investors settling before 30 June 2027 have at least one full financial year under the current rules.

Split Rate Structures and How They Work

A split rate structure allows you to fix part of the loan and leave the remainder on a variable rate.

An investor borrowing for a unit in Ormeau might fix 50 per cent of the loan for three years and leave the other 50 per cent on a variable rate. This provides partial protection from rate rises while retaining the ability to make additional repayments on the variable portion without incurring break costs. The split also allows the investor to benefit if variable rates fall, as half the loan will reprice immediately. The fixed and variable portions are treated as separate loan accounts, and each may have different fees and features. Some lenders allow offset accounts on the variable portion only, while others restrict offset accounts entirely on investment loans. A split structure can also allow an investor to stagger the expiry of fixed terms. For example, an investor might fix 50 per cent of the loan for two years and 50 per cent for four years, so that only half the loan reverts to variable at each expiry date. This reduces the risk of the entire loan reverting to a high variable rate at once.

Call one of our team or book an appointment at a time that works for you. We work with clients across Ormeau and can help you compare investment loan options from lenders across Australia, including fixed, variable and split rate structures tailored to your strategy.

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