Why Fixed Rate Investment Loans and Extra Repayments Don't Mix

Fixed Rate Investment Loans Lock Your Capital

Most fixed rate investment loans restrict extra repayments to between $10,000 and $30,000 per year without penalty. Business owners treating their investment property like a savings account will find themselves either constrained by the limit or facing break costs that can run into thousands of dollars.

A property investor with a $600,000 fixed rate loan at 5.89 per cent might have a strong cash flow year and want to park $80,000 against the loan. If the lender allows $20,000 in extra repayments without penalty, the remaining $60,000 either sits unused or triggers a break cost. That break cost depends on the difference between the fixed rate on the loan and the lender's current cost of funds. If rates have fallen since the loan was fixed, the cost can be substantial. If rates have risen, the break cost may be minimal or zero.

Variable rate loans typically allow unlimited extra repayments and full redraw access. Fixed rate loans do not. The investment loan structure you choose should reflect whether you need flexibility or certainty.

Why Lenders Restrict Extra Repayments on Fixed Rates

Lenders fund fixed rate loans by locking in their own cost of money for the fixed period. When you make an extra repayment beyond the agreed limit, the lender loses the interest they expected to earn and may also face costs in the wholesale funding market.

Break costs are calculated using the present value of the interest differential between your fixed rate and the lender's cost to replace that funding for the remaining fixed term. Most lenders publish break cost estimation tools, but the actual figure is only confirmed at the time you request the additional repayment or discharge. In our experience, break costs on fixed investment loans discharged one or two years into a three or five year term can reach $15,000 to $30,000 where rates have fallen since the loan was fixed.

Some lenders absorb the break cost if you are refinancing within the same institution or switching to a different product. Others do not. The terms are set out in the loan contract and vary between lenders.

Split Loan Structures for Investors Who Want Both

A split loan allows you to fix part of your borrowing and keep the rest on a variable rate. Business owners who want rate certainty on a portion of their debt and flexibility on the remainder will find this structure suits both goals.

Consider an investor borrowing $800,000 to acquire a commercial property in Balmain. They fix $500,000 at 5.79 per cent for three years and leave $300,000 on a variable rate at 6.24 per cent. The fixed portion provides certainty on roughly two-thirds of the debt. The variable portion allows unlimited extra repayments and full redraw access. If the investor has surplus cash in a strong quarter, they can reduce the variable portion without penalty. If they need to access that cash later, they can redraw it.

The split ratio is flexible. Some investors fix 50 per cent, others 70 or 80 per cent. The decision depends on cash flow predictability and the likelihood of needing access to equity during the fixed period. Splitting a loan does not increase the total interest cost unless the lender charges a fee to establish multiple loan accounts, which most do not. You can read more about refinancing options if your current structure no longer fits your circumstances.

Offset Accounts on Investment Loans Rarely Make Sense

Offset accounts reduce the interest charged on a loan by offsetting the balance in a linked transaction account. For owner-occupied loans, this reduces non-deductible interest and is almost always worthwhile. For investment loans, the interest is deductible, so the tax benefit of an offset is lower.

Most lenders charge a higher interest rate on investment loans with offset accounts, typically 0.10 to 0.25 percentage points above a loan without offset. For a business owner on the top marginal tax rate, the after-tax cost of that rate premium often exceeds the after-tax benefit of the offset, particularly where the offset balance is modest.

The exception is where you hold significant cash in the offset account for an extended period and your effective tax rate is low. Otherwise, a lower rate without offset and a separate high-interest savings account will deliver a better outcome. Some lenders do not offer offset accounts on fixed rate investment loans at all.

Interest-Only Investment Loans and Cash Flow Planning

Most investment loans are structured as interest-only for a period of one to five years, then revert to principal and interest repayments. Interest-only repayments on a $700,000 loan at 6.14 per cent are approximately $3,580 per month. Principal and interest repayments on the same loan over 25 years are approximately $4,620 per month.

Business owners using investment loans to build a portfolio often prefer interest-only repayments during the accumulation phase because it preserves cash flow and maximises the tax deduction. All interest on an investment loan used to acquire or hold a rental property is deductible. Principal repayments are not deductible.

If you make voluntary principal repayments during the interest-only period, you reduce the loan balance but you do not reduce the minimum required repayment. The benefit is realised when the loan converts to principal and interest, at which point the lower balance reduces the required repayment. On a fixed rate interest-only loan, voluntary principal repayments are still subject to the annual limit and break cost provisions.

Redraw Restrictions You Should Know About

Redraw allows you to withdraw extra repayments you have made above the minimum required. Variable rate investment loans typically allow unlimited redraws at no cost. Fixed rate loans either do not allow redraw at all or restrict it to the amount of extra repayments made within the annual limit.

Where redraw is allowed on a fixed rate loan, some lenders charge a fee of $50 to $300 per withdrawal. Others allow a set number of redraws per year at no cost. The terms vary widely and are not always transparent until you request the withdrawal.

Business owners relying on redraw access to fund working capital or other investments should confirm the redraw terms before settling the loan. If redraw is essential, a variable rate or split structure is usually more suitable than a fully fixed loan. The loan health check service can help you assess whether your current loan features match your actual use.

What Happens When Your Fixed Period Ends

At the end of the fixed period, your loan automatically converts to the lender's variable rate unless you proactively refinance or negotiate a new fixed term. The variable rate is typically higher than the fixed rate you were paying, particularly if you fixed during a period of lower rates.

Most lenders contact you 30 to 90 days before the fixed period ends and offer a new fixed rate. That rate is not negotiable in most cases. If you want a lower rate or different loan features, you will need to refinance with the same lender or switch to a new one.

In our experience, investors who fixed their loans in late 2021 or early 2022 at rates below 3 per cent are now facing variable rates above 6 per cent as those fixed terms expire. The monthly repayment increase on a $500,000 loan moving from 2.69 per cent fixed to 6.24 per cent variable is approximately $1,200. Business owners with multiple investment properties should review their fixed rate expiry schedule and plan refinancing discussions well in advance.

Recent Changes to Negative Gearing Rules

From the 2027-28 income year, losses from established residential investment properties acquired after 12 May 2026 can only be offset against income from other residential properties, not against salary or business income. Properties held at 12 May 2026 and new builds acquired after that date are exempt and continue to allow full negative gearing.

This change affects business owners acquiring established investment properties using borrowed funds. If your rental income and deductible expenses, including interest, produce a loss, that loss can be carried forward and used to reduce tax on future residential property income or capital gains, but it cannot reduce your assessable income from other sources in the year the loss is incurred.

The deductibility of interest itself has not changed. Interest on investment loans remains fully deductible. What has changed is the ability to use that deduction to offset non-property income for properties acquired after the specified date. Business owners considering further property acquisitions should factor this into cash flow modelling and speak with their accountant before proceeding.

Call one of our team or book an appointment at a time that works for you. We'll help you assess whether a fixed, variable or split structure fits your investment strategy and ensure your loan features match the way you actually use your borrowing.

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