Do you know how fixed rate investor loans work?

A fixed rate on an investment loan gives you certainty on your interest cost for a set period, usually between one and five years.

That certainty comes with trade-offs. You lose the flexibility to make extra repayments without penalty, you cannot access an offset account in most cases, and if you need to refinance or sell before the fixed term ends, break costs can be substantial. For property investors in Berkeley Vale, where rental yields on older strata units around The Entrance Road corridor sit around 4 to 5 per cent and vacancy rates have tightened over the past year, knowing how fixed rate features work matters when your holding costs are already thin.

Interest only or principal and interest on a fixed term

You can structure a fixed rate investment loan as interest only or principal and interest. Interest only keeps your repayments lower, which improves cash flow and maximises your deductible interest expense in any given year. Principal and interest builds equity and reduces your loan balance, but your repayments are higher and a portion of each payment is principal, which is not tax deductible.

Consider a buyer who purchases a two-bedroom unit in Berkeley Vale as a second property. They fix the rate for three years on an interest only basis. For the first three years, every dollar they pay in interest is deductible against their rental income and other income (under current negative gearing rules for properties held before May 2026). At the end of the fixed term, they can choose to revert to variable, refix, or switch to principal and interest if their cash flow has improved or if they want to start paying down the loan.

If the same buyer had chosen principal and interest from the outset, their monthly repayment would be higher, and the principal portion would provide no tax benefit. The choice depends on your cash flow, your tax position, and whether you plan to hold the property long term or sell within a few years.

What you cannot do while the rate is fixed

Most lenders do not allow extra repayments on a fixed rate investment loan, or they cap additional payments at a low annual limit, often around $10,000 to $30,000 depending on the lender. If you exceed that limit, you may be charged an early repayment fee. Offset accounts are also unavailable on almost all fixed rate products. If you have surplus cash and want to reduce the effective interest you pay, you cannot park it in an offset and let it work against your loan balance the way you can with a variable rate loan.

You also cannot split your loan structure or adjust your repayment type during the fixed term without breaking the contract. If you fix at interest only and later want to switch to principal and interest, you will either need to wait until the fixed term ends or pay break costs to exit early.

Break costs and why they matter for investors

Break costs apply when you repay, refinance or restructure a fixed rate loan before the end of the fixed term. The cost is calculated based on the difference between the rate you locked in and the rate the lender can earn by reinvesting the funds for the remaining term, adjusted for the amount you are repaying and the time left on your fixed period.

If rates have fallen since you fixed, break costs can be significant. If rates have risen, the break cost may be zero or the lender may even provide a small rebate. The calculation is opaque and varies between lenders, but the risk is real. An investor who fixed a rate in late 2022 or early 2023 and now wants to refinance to access equity for a second purchase could face break costs in the tens of thousands of dollars if wholesale rates have dropped.

For Berkeley Vale investors, this becomes relevant if you are holding a unit near the lake precinct and want to leverage that equity to buy another property before the fixed term expires. You need to factor break costs into the viability of the second purchase.

Split loans and how they work for investment properties

A split loan lets you fix part of your loan and keep part variable. You might fix 50 per cent of the loan for three years and leave the other 50 per cent on a variable rate with an offset account. This gives you rate certainty on half your borrowing while preserving flexibility on the other half.

The variable portion lets you make extra repayments, access an offset, and avoid break costs if you need to refinance or sell. The fixed portion locks in your interest cost on that slice of the loan. If you are an investor using a split structure and you later decide to sell, you only pay break costs on the fixed portion, and only if rates have moved in the lender's favour.

Split loans add complexity because you are managing two loan accounts with different terms, but they are common among property investors who want some protection from rate rises without losing all their flexibility.

How fixed terms affect your tax position under the new rules

From the 2027-28 income year, losses on established investment properties purchased after May 2026 can only be offset against income from other residential properties, not against your salary or business income. Interest on your investment loan is still deductible, but if your property runs at a loss, that loss is quarantined unless you have other property income to absorb it.

If you fixed your rate in 2026 on an established property and your fixed term runs until 2029, your interest cost is known, but your ability to use that deduction has changed. For new builds purchased after May 2026, you can still deduct losses against all income, and when you eventually sell, you can choose between the old CGT discount and the new indexed cost base treatment.

Fixed rate loans do not change the tax treatment of your interest, but they do lock in your cost during a period when the rules around how you use that deduction are shifting. If you are holding a property that falls under the new quarantine rules and your cash flow is tight, locking in a rate might give you certainty, but it will not give you access to an offset or the ability to pay down the loan faster if you find yourself with surplus cash.

When a fixed rate makes sense and when it does not

A fixed rate makes sense if you value certainty over flexibility, if you expect rates to rise during the fixed period, or if your cash flow is tight and you cannot afford a rate increase. It also makes sense if you are structuring the loan as interest only and you have no intention of making extra repayments or accessing an offset.

A fixed rate does not make sense if you might need to sell or refinance within the fixed term, if you have surplus cash and want to reduce your interest cost with an offset account, or if you value the ability to make lump sum repayments without penalty. For investors, the decision often comes down to whether you are holding the property for income or for growth, and whether your strategy involves leverage for further purchases in the next few years.

If you are buying in Berkeley Vale and planning to hold for ten years, fixing for three to five years gives you a window of known costs while the market settles. If you are planning to build a portfolio and refinance within two years to access equity, a variable rate with an offset and full redraw gives you more room to move.

Not sure which structure fits your plan or whether a fixed term works with your tax position and holding strategy? Call one of our team or book an appointment at a time that works for you.

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