Common Mistakes With Fixed Rate Investment Loans by Life Stage

A fixed rate investment loan suits the investor who values certainty over flexibility, and that need changes as life changes. This article walks through three life stages and the mistakes that tend to show up at each one, for anyone in Granville thinking about a property investment loan.

Is a Fixed Rate Right for Your Investment Loan?

A fixed rate locks your interest rate for a set period, so your repayments stay the same until the term ends. The main trade-off is flexibility, because features such as extra repayments, redraw or an offset account may be limited or unavailable on a fixed portion, depending on the lender.

The common mistake is choosing a fixed rate because it feels safe, without checking what you give up. Before you sign, ask the lender whether you can make extra repayments, whether there are break costs if you sell or refinance early, and how those costs are worked out. Lenders set these terms themselves, so they differ from one product to the next.

If you want to compare structures side by side, our investment loans page covers the options available through our lender panel.

Fixed Rate Investment Loans in Your 30s and 40s

Some investors in their 30s and 40s have tight household budgets, so a fixed rate can help by keeping repayments predictable while the household budget is stretched. The risk is that this life stage is also when plans change, such as a new job, a growing family or a move, and exiting a fixed loan early can trigger break costs.

Consider a buyer in Granville with a young family who fixes their whole investment loan for a few years to protect the budget. Two years in, they want to sell the property and put the money towards a bigger home. Because the loan was entirely fixed, they face break costs on the full balance. Had they split the loan, fixing one portion and leaving the other variable, only the fixed portion would carry that exposure, and the variable portion could be paid down or changed more freely.

In a scenario like this, the outcome is that a split keeps some certainty while limiting what is at risk if plans shift. The cost of a split is that only part of your repayments is protected if rates rise, and the variable portion moves with the market. Whether a split loan lets you transfer money between portions, or use an offset on the fixed portion, depends on the lender.

When you work out how much you can borrow, remember that lenders regulated by APRA must test your ability to repay at a rate at least 3.0 percentage points above the loan's rate. Our borrowing capacity page explains how that assessment affects your result. Fixing the rate does not remove this test.

Interest Only or Principal and Interest on a Fixed Loan

Some lenders may offer both interest-only and principal and interest repayments on fixed investment loans, and availability and terms vary by lender. Interest-only repayments are lower in the short term because you are not paying down the loan balance, but the balance stays the same.

As an illustration only, take a loan of $600,000 at 6.75% p.a. Interest alone costs $40,500 a year, or about $3,375 a month. If the loan is principal and interest over 30 years at the same rate, the repayment is roughly $3,891 a month. If it is interest-only for five years and then reverts, the repayment over the remaining 25 years at 6.75% is roughly $4,145 a month. So the interest-only choice lowers your repayments for five years, then lifts them above where a 30-year principal and interest loan would have been.

For tax, interest on a loan used for a rental property is generally deductible, but the principal part of a repayment is not. Interest-only does not automatically mean a bigger tax benefit, so speak to your accountant about your own situation.

Lenders also assess interest-only loans on the principal and interest repayments over the remaining term after the interest-only period. That means choosing interest-only does not increase how much you can borrow.

Fixed Rates for Investors Approaching Retirement

Investors approaching retirement often value certainty, and a fixed rate can make budgeting easier when income is about to drop. The risk is that a fixed term can end at an awkward time, and you may need to refinance or choose a new rate when your income looks different.

A common mistake is letting the fixed term run out without a plan. When it ends, most loans move to a variable rate set by the lender, which may be different from what you expected. Reviewing your options a few months before expiry gives you time to compare. Our fixed rate expiry page explains what to check, and if you decide to move lenders, refinancing is worth looking at.

If you plan to rely on rental income, remember that lenders generally count only part of expected rent. APRA's guidance is that prudent policies count no more than 80 per cent of expected rent, to allow for vacant periods.

Granville Investors: Matching the Loan to the Plan

Granville is in postcode 2142, and our Granville page has more on how we work with local residents. Whatever your life stage, the best starting point is your own plan: how long you intend to hold, how much flexibility you need, and how comfortable you are if rates move.

Working with a broker lets you compare fixed and variable options from lenders across Australia rather than just one bank. Rate discounts, break cost methods and features vary by lender, so ask for them in writing before you commit.

Call one of our team or book an appointment at a time that works for you, and we will talk through which fixed rate structure suits your stage of life.

Frequently Asked Questions