Beginner's guide to Fixed Rate Investment Loans

A fixed rate investment loan locks your interest rate for a set period, usually between one and five years.

Most investors choose a fixed rate to create certainty around their holding costs, particularly when rental income needs to cover a predictable portion of the mortgage. The fixed period means your repayment amount stays the same regardless of what happens to variable rates during that time.

Can You Make Extra Repayments on a Fixed Rate Investment Loan?

Most fixed rate investment loans allow extra repayments up to a capped amount each year, typically around $10,000 to $30,000 depending on the lender. Beyond that cap, you may face break costs if you repay more than the agreed amount. Some lenders do not allow any extra repayments during the fixed period.

Consider an investor in Hobart who purchased a unit in Glenorchy on a fixed rate investment loan. They received a workplace bonus and wanted to reduce the loan balance. Their loan allowed $20,000 in additional repayments each year without penalty. They made a lump sum payment of $15,000, which reduced their principal without triggering any fees. The loan continued on the same fixed rate, but the reduced balance meant less interest accrued over the life of the loan.

If that same investor had tried to repay $50,000, the lender would have charged break costs on the amount above the annual cap. Break costs compensate the lender for lost interest when you repay more than expected during a fixed term.

How Break Costs Are Calculated

Break costs depend on the difference between your fixed rate and the lender's current cost of funds for the remaining fixed period. If rates have fallen since you fixed, the lender loses income and you pay the difference. If rates have risen, break costs are usually zero.

Lenders calculate break costs using a formula that compares your loan's fixed rate to the wholesale rate the lender can now achieve for the remaining term. The calculation also factors in the amount being repaid early and the time left on the fixed period. A repayment made one year into a five-year fixed term will generally attract higher break costs than a repayment made four years in, all else being equal.

Why Fixed Rate Limits Exist on Investment Loans

Fixed rate loans are funded by the lender through wholesale borrowing at a locked cost. When you fix your rate, the lender commits to that funding structure for the term. If you repay early or exceed the cap, the lender's hedging position is disrupted, which is why break costs exist.

Investment loans often have stricter conditions than owner-occupied loans because lenders treat them as higher risk. This includes tighter caps on extra repayments during fixed periods. Some lenders offer no extra repayment capacity at all on fixed rate investment loans.

Does Paying Extra on a Fixed Investment Loan Make Sense?

It depends on your tax position and cash flow needs. Interest on an investment loan is usually tax deductible, so paying down the loan faster reduces your deductions. For an investor on a marginal tax rate of 37 per cent (including the Medicare levy), every dollar of interest paid reduces taxable income by that amount.

In some scenarios, keeping the loan balance higher and redirecting surplus cash to an offset account linked to a non-deductible loan, such as your home loan, delivers a greater after-tax benefit. This is the principle behind debt recycling, where investors maintain deductible debt and eliminate non-deductible debt first.

An investor in Launceston refinanced their investment property loan and kept a portion on a variable rate with an offset account. They directed rental income and surplus wages into the offset, which reduced interest on the variable portion while preserving full deductibility. The fixed portion of the loan remained untouched to avoid break costs, and the split structure gave them control over repayments without penalty.

What Happens When Your Fixed Period Ends

At the end of the fixed term, your loan automatically reverts to the lender's standard variable rate unless you choose to refix or refinance. The reversion rate is often higher than the lender's current advertised variable rate for new customers. Many investors refinance their investment loan at this point to access a lower rate or better loan features.

You will not face break costs once the fixed period expires, so this is the time to make lump sum repayments, switch to interest-only if needed, or move the loan to a new lender. Speak with a broker well before your fixed term ends so you have time to compare options and avoid rolling onto an uncompetitive rate.

Fixed Rate Investment Loans in Tasmania

Tasmania's property market has seen consistent rental demand in suburbs like Glenorchy, Moonah and Rokeby, supported by limited housing supply and interstate migration. Investors in these areas often favour fixed rates to lock in serviceability during periods of rising rents, particularly where body corporate fees or vacancy rates add variability to cash flow.

Rental yields in regional Tasmanian centres tend to be higher than in Hobart, but access to loan products can vary. Some lenders apply postcode-based restrictions or require larger deposits for properties in certain areas. A mortgage broker with access to a broad panel can help match your property location to lenders who will support it at competitive rates.

Call one of our team or book an appointment at a time that works for you. We'll walk you through fixed rate investment loan options, explain how extra repayment caps apply to each lender, and help structure your loan to suit your tax position and long-term property goals.

Frequently Asked Questions