Understanding the Basics of Fixed Rate Investment Loans

What a Fixed Rate Means for Your Investment Loan

A fixed rate locks your interest rate for a set period, typically one to five years. During that time, your repayments stay the same regardless of what the Reserve Bank or lenders do with rates. For property investors in Melbourne, this can mean predictable cash flow and certainty around your monthly rental income shortfall or surplus.

Consider a buyer who purchases a two-bedroom apartment in Richmond as an investment property. They borrow $650,000 on a fixed rate for three years. The rental income covers about 80 per cent of the monthly repayment, leaving a $400 shortfall each month. With a fixed rate, that shortfall stays at $400 for the full three years. If they had chosen a variable rate and the lender increased rates twice during that period, the shortfall could have grown to $550 or more.

The Trade-Off Between Certainty and Flexibility

Fixed rates offer stability, but they come with restrictions. Most fixed rate investment loans limit or prevent extra repayments, and you usually cannot access an offset account linked to that loan. If you plan to pay down your investment loan faster or want to park rental income in an offset to reduce interest, a fixed rate may not suit your strategy.

In the scenario above, the Richmond investor receives rental income into a transaction account and pays the loan monthly. They cannot reduce the interest charged by holding that income in an offset. If they sell the property or refinance before the three-year term ends, they will likely face break costs, which are calculated based on the lender's funding cost and the difference between the fixed rate and current wholesale rates.

Rate Discounts and How They Apply to Fixed Terms

Lenders offer different rate discounts for fixed and variable loans. A lender might provide a 0.80 per cent discount on a variable investment loan but only 0.40 per cent on a three-year fixed term. The discount also depends on your loan-to-value ratio. Borrowers with a deposit of 20 per cent or more typically receive better discounts than those borrowing at 90 per cent LVR.

When comparing fixed rate products, ask your broker for the comparison rate and the base rate before discount. Some lenders advertise low fixed rates but apply higher rates once the fixed term ends. Others revert to a standard variable rate that sits well above the discounted variable rates available to new customers. Understanding what happens at the end of the fixed term is as important as the rate you lock in today.

Interest-Only Fixed Terms and Investor Cash Flow

Many property investors choose interest-only repayments on their investment loans to maximise cash flow and tax deductions. You can fix the rate on an interest-only term, but the interest-only period and the fixed rate period do not always align. A lender might offer five years interest-only but only allow you to fix the rate for three years.

In our experience, investors borrowing for property in South Melbourne or South Yarra often structure their loans with a three-year fixed interest-only term, then switch to variable once the fixed term ends. This gives them certainty during the early years when rental income is lower and vacancy risk is higher, then flexibility to refinance or adjust the structure once the property has gained value.

What Happens When Your Fixed Rate Ends

When the fixed term expires, your loan automatically reverts to a variable rate unless you choose to refix or refinance. The reversion rate is usually the lender's standard variable rate, which can be significantly higher than the discounted variable rates offered to new customers. If you do nothing, your repayments can jump by several hundred dollars per month.

Most lenders contact you 30 to 60 days before your fixed term ends. At that point, you can negotiate a new fixed rate, switch to a variable rate with a discount, or refinance to another lender. If you have built equity in the property or your financial position has improved, refinancing can give you access to lower rates and better features than your current lender offers existing customers.

Partial Fixed Rates and Split Loan Structures

You do not need to fix your entire loan amount. A split structure allows you to fix part of the loan and keep part on a variable rate. For example, you might fix 60 per cent of your investment loan and leave 40 per cent variable. The variable portion gives you access to an offset account and the ability to make extra repayments, while the fixed portion gives you certainty on the majority of your debt.

This structure works particularly well for investors who expect irregular income or plan to use equity from the investment property to fund future purchases. The variable portion can be paid down or redrawn without triggering break costs, while the fixed portion provides a stable base repayment.

How APRA Settings Affect Fixed Rate Investment Loans

Lenders assess your ability to service an investment loan using a buffer of three percentage points above the product rate. If you apply for a fixed rate at 5.80 per cent, the lender will assess whether you can afford repayments at 8.80 per cent. They also apply the debt-to-income cap, which limits how much you can borrow relative to your household income.

These settings apply regardless of whether you choose a fixed or variable rate, but they can influence your decision. If you are borrowing close to your maximum capacity, a fixed rate gives you protection against rate rises that would otherwise push your actual repayments above what you can afford. The lender has already tested your ability to service the loan at a higher rate, but that does not mean your household budget can absorb a sudden increase in repayments if rates rise sharply.

Rental Income and Vacancy Allowances in Serviceability

When you apply for an investment loan, lenders only count 80 per cent of the rental income when assessing your borrowing capacity. This buffer accounts for vacancy periods, maintenance costs and property management fees. If the property generates $2,400 per month in rent, the lender will only credit you with $1,920 per month in income.

If you choose a fixed rate, the lender still applies this 80 per cent rule, but your actual repayments are locked in. That means you know exactly what your monthly shortfall will be for the duration of the fixed term. For investors in Melbourne's inner suburbs, where rental yields are lower but capital growth has historically been stronger, this certainty can make budgeting much simpler.

Making the Call Between Fixed and Variable

The choice depends on your cash flow, your risk tolerance, and what you plan to do with the property over the next few years. If you need certainty and you are not planning to sell or refinance in the short term, a fixed rate gives you that stability. If you want flexibility to make extra repayments, access an offset account, or refinance without penalty, a variable rate or a split structure is usually a better fit.

Talk to one of our team about your specific situation. We can model different structures using current rates and help you understand how changes in interest rates, rental income or property values might affect your position. Call one of our team or book an appointment at a time that works for you.

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