If you're considering an investment property in Preston, one of the first loan decisions you'll face is whether to fix your rate, keep it variable, or split the difference.
The answer depends on what you value most: predictable repayments, ongoing flexibility, or a balance of both. Each structure behaves differently when rates move, when you need access to funds, or when your investment strategy changes.
What a Fixed Rate Investment Loan Means for Your Preston Property
A fixed rate investment loan locks your interest rate for a set period, usually between one and five years. During that time your repayments stay the same regardless of what the Reserve Bank does.
Consider someone purchasing a two-bedroom unit near Northland Shopping Centre with a 20 per cent deposit. They fix the entire loan amount for three years at the rate available at settlement. For the next three years, rental income and repayments remain predictable, which makes budgeting and tax planning much easier. If interest rates rise during that period, the repayments don't change. If rates fall, they're locked in at the higher rate until the fixed term ends.
Fixed rates suit investors who want certainty over the short to medium term, particularly if they're carrying other variable debts or if rental income is tight. The downside is reduced flexibility. Most fixed rate products limit extra repayments to around $10,000 to $30,000 per year without triggering break costs. If you sell the property or refinance before the fixed term ends, break costs can apply. These costs reflect the economic loss to the lender and are calculated based on the difference between your fixed rate and current wholesale rates, the remaining term, and your loan balance. They're not penalties, but they can add up to thousands of dollars if rates have dropped significantly since you fixed.
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How Variable Rate Investment Loans Work in Practice
A variable rate moves up or down in line with changes from your lender, which are usually influenced by the Reserve Bank cash rate. Your repayments adjust accordingly.
Variable loans generally offer more flexibility than fixed loans. You can make unlimited extra repayments, redraw funds if the loan allows it, or pay off the loan in full without break costs. Many variable investment loans also come with offset accounts, which reduce the interest charged by using your everyday transaction balance to offset the loan amount. That can be particularly useful if you're holding funds for future property costs such as maintenance, body corporate fees, or land tax.
The trade-off is that your repayments move with the market. If interest rates rise, so do your repayments. That can reduce the passive income from your rental property or increase the size of your negative gearing claim, depending on how your numbers sit. Variable rates give you the flexibility to adapt your loan structure as your property investment strategy evolves, but they require you to budget for rate increases.
What a Split Loan Structure Offers
A split loan divides your total borrowing into two portions. One portion is fixed, the other is variable. You choose the split, and most lenders allow any combination.
For example, an investor purchasing a renovated Edwardian home in the Preston Market precinct might borrow 80 per cent of the property value and split the loan 50/50. Half is fixed for three years to provide stable repayments during the early years of ownership. The other half stays variable with an offset account attached, allowing them to park rental income and reduce interest charges while retaining access to those funds for repairs or future portfolio growth.
The benefit of splitting is that you're not making an all-or-nothing decision. You get some protection if rates rise, but you also keep some flexibility if you want to make extra repayments, access equity, or refinance part of the loan. The variable portion can also be paid down faster without triggering break costs.
One consideration is that you'll manage two loan accounts instead of one. That means two sets of fees, and potentially two interest rate reviews if you refinance later. But for many investors, particularly those building a portfolio or holding properties long term, the combination works well.
Choosing the Structure That Fits Your Investment Strategy
The right loan structure depends on what you're trying to do with the property and how you handle uncertainty.
If you want stable repayments and plan to hold the property for several years without needing to access equity or make large extra repayments, a fixed rate can work well. If you value flexibility, want to use an offset account, or plan to pay down the loan faster, a variable rate is usually more suitable. If you want a bit of both, a split gives you options.
Preston's rental market includes a mix of older-style homes, newer townhouses near High Street, and units within walking distance of Preston Station. Rental demand is steady due to proximity to the CBD, local schools, and public transport. Vacancy rates in the area tend to remain low, which supports reliable rental income. That stability can make either loan structure viable, depending on your broader financial position.
Another factor is your borrowing capacity and deposit. Most lenders treat investment loans more conservatively than owner-occupier loans. Rental income is typically shaded by 20 per cent when calculating serviceability, and a higher deposit often results in a better interest rate. If you're borrowing at a higher loan to value ratio, LMI will apply, and that premium is added to the loan balance or paid upfront. The structure you choose won't change whether LMI applies, but it will affect how much flexibility you have once the loan settles.
When You Might Want to Refinance or Adjust Your Loan
Your loan structure isn't permanent. Many investors refinance after a few years to access equity, secure a better rate, or shift between fixed and variable depending on market conditions.
If your fixed term is coming to an end, the loan will automatically revert to a variable rate unless you choose to refix. That's a good time to compare your current rate against what else is available. If you're on a variable rate and want more certainty, you can switch part or all of the balance to a fixed rate, though some lenders charge a fee to do that mid-term.
Refinancing can also make sense if you're expanding your property portfolio. Releasing equity from your Preston property to use as a deposit on a second investment is common, and that's easier to do with a variable or split loan structure. Keep in mind that refinancing has costs, including application fees, valuation fees, and sometimes discharge fees from your current lender. Those costs need to be weighed against the benefit of the new loan.
If you're considering a refinance to access better investment loan options or to release equity for portfolio growth, the structure you choose now will affect how much flexibility you have later.
Understanding Interest-Only Repayments on Investment Loans
Most investment loans offer the option to make interest-only repayments for a set period, usually up to five years. During that time you only pay the interest charged each month, and the loan balance doesn't reduce.
Interest-only repayments lower your monthly cash outflow, which can be useful if rental income doesn't fully cover the loan repayment and other property costs. It also allows you to direct surplus funds toward other investments or into an offset account to reduce interest charges without locking the money away.
The trade-off is that you're not building equity through repayments. Once the interest-only period ends, the loan reverts to principal and interest, and your repayments increase. That's not a problem if you've planned for it, but it does mean your cash flow will tighten at that point.
Interest-only periods can be set on fixed, variable, or split loans. If you're using interest-only to maximise cash flow in the early years, make sure you understand when the repayments will change and how that will affect your budget.
Call one of our team or book an appointment at a time that works for you. We'll walk through the different loan structures, explain how each one fits with your investment goals, and help you compare options from lenders across Australia.
Frequently Asked Questions
What is the difference between a fixed and variable investment loan?
A fixed rate investment loan locks your interest rate for a set period, usually one to five years, so your repayments stay the same. A variable rate moves with the market and offers more flexibility, including unlimited extra repayments and no break costs if you refinance or sell.
Can I split my investment loan between fixed and variable rates?
Yes, a split loan divides your borrowing into two portions. One part is fixed and the other stays variable. You choose the split, and it gives you both stable repayments and ongoing flexibility.
What are break costs on a fixed rate investment loan?
Break costs apply if you pay off, sell or refinance a fixed rate loan before the fixed term ends. They're calculated based on the difference between your fixed rate and current wholesale rates, the remaining term, and your loan balance.
Should I choose interest-only repayments for my investment loan?
Interest-only repayments reduce your monthly outflow and can improve cash flow if rental income doesn't cover all property costs. The loan balance doesn't reduce during the interest-only period, and repayments increase once it ends.
Can I refinance my investment loan if I want to change the structure?
Yes, you can refinance to access equity, secure a better rate, or switch between fixed and variable. Refinancing has costs including application fees, valuation fees and sometimes discharge fees from your current lender.
