Choosing between fixed, variable, and split rate structures on an investment loan determines how much control you have over repayments and how exposed you are to rate movements.
As a teaching assistant, your income is stable but limited. When you're weighing up buying your first investment property, the loan structure you choose affects your ability to make extra repayments, access equity later, and respond to interest rate changes. Each option has different trade-offs, and none of them suits every situation.
Variable Rate Investment Loans: What You're Actually Paying For
A variable rate loan moves with the official cash rate and your lender's margin. When rates drop, your repayments drop. When they rise, so do your costs.
Consider a teaching assistant who borrows $450,000 to buy a unit in Wollongong. She chooses a variable rate structure with an offset account attached. Her rental income covers most of the repayment, and she parks her salary in the offset account to reduce the interest charged each month. When rates rise by 0.25%, her repayment increases by around $65 per month, but she can make lump sum payments from her tax refund without penalty. When she wants to leverage equity to buy a second property three years later, there are no exit fees or break costs. She refinances to a different lender offering a lower variable interest rate and a cash incentive.
Variable structures let you refinance, make unlimited extra repayments, and access features like offset accounts. You absorb all the risk when rates rise, but you benefit immediately when they fall.
Fixed Rate Investment Loans: Locking In Certainty
A fixed rate holds your interest rate steady for a set period, typically one to five years. Your repayment amount doesn't change during that time, regardless of what happens to the official cash rate.
If you fix at 5.8% and rates climb to 6.5%, you're protected. If rates drop to 5.2%, you're stuck paying the higher amount until the fixed term ends. Most fixed rate products don't allow offset accounts, and they limit extra repayments to around $10,000 to $30,000 per year depending on the lender. If you want to refinance or sell the property before the fixed term ends, you'll pay break costs. These can run into thousands of dollars if rates have fallen since you locked in.
Fixed rates suit investors who want predictable cashflow and don't plan to make large extra repayments or access equity during the fixed period. They're less useful if your property investment strategy involves building a portfolio quickly or refinancing to access equity within a few years.
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Split Rate Loans: Dividing the Risk
A split loan divides your total loan amount between fixed and variable portions. You choose the split, commonly 50/50 or 70/30.
In our experience, teaching assistants often split an investment loan to balance predictability with flexibility. You might fix $300,000 of a $500,000 loan at 5.6% for three years, and leave $200,000 on a variable rate with an offset account. The fixed portion protects you from rate rises on most of your debt. The variable portion lets you make extra repayments, use an offset, and access features without penalty.
The downside is complexity. You're managing two loan accounts, often with different repayment dates. If you want to refinance your investment loan, you'll need to calculate break costs on the fixed portion and compare that against the rate discount you'd get with a new lender. Some lenders charge two sets of fees because you're technically holding two products.
Split structures work when you want some protection from rate rises but don't want to give up all your flexibility. They're less useful if you're planning major portfolio changes in the short term, because the fixed portion still creates friction.
Interest Only Versus Principal and Interest on Investment Loans
Interest only repayments mean you're only covering the interest charged each month, not reducing the loan amount. Principal and interest repayments chip away at the debt over time.
Most property investors choose interest only for the first few years to keep repayments lower and maximise tax deductions. The interest you pay on an investment loan is a claimable expense, so keeping the loan balance high has tax benefits. If you make principal repayments, you're reducing the debt with after-tax income, which doesn't help your tax position.
Interest only periods typically last one to five years, then the loan reverts to principal and interest unless you apply to extend it. Some lenders restrict interest only to variable rate loans. Others allow it on fixed rates but charge a slightly higher rate for the privilege.
Whether you're on a variable rate, fixed rate, or split, you can usually choose between interest only and principal and interest. This choice affects your cashflow more than the rate structure does, particularly in the early years when rental income might not cover a full principal and interest repayment.
How Rate Structure Affects Your Ability to Grow a Portfolio
When you want to buy a second investment property, lenders assess your borrowing capacity based on your existing debts and rental income. If your first property is on a fixed rate loan and you've paid down $40,000 of the principal, that equity is locked unless you're willing to pay break costs to refinance.
Variable rate loans let you access equity as it builds without penalty. You can apply for a top-up or refinance to a different lender if they're offering better investor interest rates or a higher loan to value ratio. Fixed rate loans create a waiting period. You either pay the break costs or wait until the fixed term ends before you can move.
Split loans sit in the middle. You can access equity from the variable portion without penalty, which might be enough to fund a deposit on a second property if you've structured the split correctly from the start.
Call one of our team or book an appointment at a time that works for you. We'll run the numbers on your current income, deposit, and investment goals to show you which loan structure actually fits your situation.
Frequently Asked Questions
What is the main difference between fixed and variable investment loans?
A fixed rate loan locks your interest rate for a set period, usually one to five years, giving you predictable repayments but limiting flexibility. A variable rate loan moves with market rates, letting you make unlimited extra repayments and access features like offset accounts without break costs.
Can I make extra repayments on a fixed rate investment loan?
Most fixed rate loans allow limited extra repayments, typically $10,000 to $30,000 per year depending on the lender. Going beyond that limit triggers break costs, which can be substantial if interest rates have fallen since you fixed your rate.
How does a split rate investment loan work?
A split loan divides your total borrowing between fixed and variable portions. You might fix $300,000 at a set rate and leave $200,000 variable, giving you some protection from rate rises while maintaining flexibility to make extra repayments on the variable portion.
Should I choose interest only or principal and interest for an investment loan?
Most property investors choose interest only for the first few years to keep repayments lower and maximise tax deductions, since the interest is claimable. Principal and interest repayments reduce your debt but use after-tax income, which doesn't provide the same tax benefit.
Does my loan structure affect my ability to buy a second investment property?
Yes. Fixed rate loans can lock your equity until the fixed term ends unless you pay break costs to refinance. Variable rate loans let you access equity as it builds without penalty, making it easier to fund deposits on additional properties.
