When to Fix an Investment Loan & for How Long

Fixed rate terms on investment loans work differently to owner-occupied lending.

The decision about whether to fix, and for how long, depends on your cash flow tolerance, your view on rates, and how the recent changes to negative gearing affect your ability to claim losses. A two or three year fixed term often suits investors who want certainty over their holding costs during the first few years of ownership, particularly if rental income doesn't cover all expenses. Longer terms lock you in but remove flexibility if your strategy changes or you need to sell.

Why Investment Loans Treat Fixed Rates Differently

Most lenders treat investment lending as higher risk than owner-occupied lending. That shows up in slightly higher interest rates and stricter serviceability calculations, but it also affects how fixed rate products are structured. Some lenders will let you fix the entire loan amount on an owner-occupied property but cap the fixed portion on an investment loan at 80% or 90% of the total. Others allow full fixing but charge a higher rate for investment purposes compared to the equivalent owner-occupied product.

If you're borrowing at a high loan to value ratio and paying Lenders Mortgage Insurance, check whether your lender allows you to fix the full amount or only a portion. That determines whether you're managing one variable portion or splitting your loan from the start.

How the 2026 Budget Changes Affect Fixed Rate Decisions

From 1 July 2027, negative gearing deductions on established residential properties purchased after 12 May 2026 will only offset rental income or capital gains from residential property, not other income like salary. That changes the cash flow equation if you were relying on tax deductions to absorb a shortfall between rent and loan repayments.

Consider an academic who purchased an established apartment in May 2026 with an interest only investment loan at a variable rate. Under the old rules, a $12,000 annual shortfall between rental income and loan interest could be claimed against salary, reducing tax by around $5,500 at a marginal rate of 45%. From July 2027, that deduction no longer applies to wage income. The shortfall still exists, but it's carried forward to offset future rental income or capital gains rather than providing immediate tax relief.

That makes cash flow predictability more valuable. A fixed rate term of two or three years gives you certainty over what the holding cost will be while you adjust to the new tax treatment. If rates fall during that period, you miss out on savings, but if they rise, you avoid a bigger out-of-pocket expense at a time when tax offsets are limited.

Interest Only Versus Principal and Interest on a Fixed Term

Most investment loans for teachers and academics are structured as interest only for the first few years, then revert to principal and interest. Fixing an interest only loan keeps repayments lower and more predictable, which suits investors focused on cash flow rather than debt reduction. Fixing on a principal and interest basis means higher repayments but faster equity build-up.

If you fix on an interest only basis for three years, your repayments stay flat for that period. When the interest only period ends, you'll revert to principal and interest at whatever the variable rate is at that time, and repayments will jump. If you fix on principal and interest from the start, the repayment increase is gradual rather than sudden, but you're paying down debt during the fixed period rather than maximising deductions.

The choice depends on whether you're prioritising tax efficiency or loan reduction. Investors affected by the negative gearing changes may prefer principal and interest structures to reduce reliance on deductions, while those with properties purchased before the Budget cut-off may still favour interest only to maximise claimable expenses.

Two Year Terms Versus Five Year Terms

Two and three year fixed terms are the most common for investment loans. They give you rate certainty during the early years of ownership without locking you in for too long. Five year terms were more popular when rates were at historic lows, but they carry higher break costs if you need to exit early, and fewer lenders offer competitive five year investment rates compared to shorter terms.

A two year term suits investors who expect rates to stabilise or fall within that window, or who may want to refinance their investment loan to access equity for a second purchase. A five year term suits investors who want to set repayments and forget about them, but only if the fixed rate is low enough to justify the lack of flexibility.

Break costs are calculated based on the difference between your fixed rate and the lender's current cost of funds, multiplied by the remaining term. If you fixed at 6.5% for five years and rates drop to 5%, you'll pay the lender the lost interest for the remaining period. On a $500,000 loan with three years left on the fixed term, that could be $20,000 or more. On a two year term with one year remaining, the cost would be much lower.

Splitting Fixed and Variable Portions

Some investors split their loan into fixed and variable portions rather than fixing the whole amount. A common split is 50/50 or 60/40 fixed to variable. That gives you some rate certainty while keeping part of the loan flexible for extra repayments or offset account access.

Most fixed rate investment loans don't allow offset accounts, so any cash you're holding to cover vacancies or repairs needs to sit in a separate account earning interest, which is taxable. The variable portion can be linked to an offset, meaning cash in that account reduces the interest charged without triggering income tax. That makes a split structure useful if you're holding a buffer or accumulating funds for the next purchase.

The downside is complexity. You're managing two loan accounts with different rates, different terms, and different rules around repayments and break costs. If you're buying your first investment property, a single variable loan or a single fixed term is often easier to manage than a split.

When Variable Rates Make More Sense

Variable rates make sense if you think rates are likely to fall, if you want full access to an offset account, or if you're planning to sell or refinance within a couple of years. They also make sense if you're using a line of credit or equity release structure to fund the deposit, as those products are almost always variable.

If you're expanding your property portfolio and expect to refinance within 12 to 18 months to pull equity out for the next purchase, locking into a fixed term adds break costs without much benefit. You're better off on a variable rate with an offset, keeping your cash accessible and your loan structure flexible.

Variable rates also suit investors who are comfortable with repayment fluctuations and want the option to make extra repayments without restriction. Fixed loans typically cap extra repayments at $10,000 to $30,000 per year, and any amount above that triggers break costs.

What to Ask Your Broker Before Fixing

Before you commit to a fixed rate term, ask whether the lender allows splitting, whether the fixed rate applies to interest only or principal and interest, and what the break cost formula is. Ask whether you can switch between interest only and principal and interest during the fixed term, or whether that change is only allowed when the fixed period ends.

Ask whether the lender offers a rate discount for fixing, or whether the variable rate product has a better discount and lower ongoing rate. Some lenders advertise low fixed rates but load the cost into higher ongoing fees or less competitive variable rates once the fixed term expires.

If you're likely to need access to equity within the fixed period, ask whether the lender allows you to increase the loan amount mid-term or whether that triggers a full refinance with break costs. Most lenders treat a top-up as a new loan, which means the fixed portion stays locked and the additional borrowing is added as a separate variable split.

Call one of our team or book an appointment at a time that works for you. We'll walk through the rate options, the terms available, and how the structure fits with your broader investment strategy and the recent Budget changes.

Frequently Asked Questions