Fixed Rate Investment Loans: The Pros and Cons

Understanding Fixed Rate Investment Loans

When buying an investment property in Bass, one of the most important decisions you'll face is choosing between a fixed interest rate and a variable interest rate. Fixed rate investment loan products offer certainty in your repayments, which can be particularly valuable when developing your property investment strategy.

A fixed rate loan locks in your interest rate for a specified period, typically ranging from one to five years. During this time, your investment loan repayments remain constant regardless of market fluctuations. This predictability makes calculating investment loan repayments straightforward and helps you plan your cash flow more effectively.

The Benefits of Fixed Rate Investment Loans

Fixed rate investment loan options provide several advantages for property investors:

• Repayment certainty: Your investor interest rates remain unchanged during the fixed period, protecting you from rate rises
• Budget protection: Knowing your exact loan repayments helps with managing rental income and expenses
• Financial planning: Fixed terms make it easier to calculate potential negative gearing benefits and maximise tax deductions
• Peace of mind: Protection from variable interest rate increases provides stability for your investment property finance

For property investors seeking to build wealth through property while maintaining predictable expenses, fixed rate terms can be particularly appealing. When you access investment loan options from banks and lenders across Australia through Cairncross Group Capital, you'll find various fixed rate investment loan products designed to suit different investment strategies.

The Drawbacks of Fixed Rate Terms

While fixed interest rates offer stability, they also come with limitations that property investors should consider:

• Break costs: Exiting a fixed rate loan early typically incurs significant fees
• Limited flexibility: Most fixed rate investment loan features restrict additional repayments
• Missed opportunities: If variable rates fall, you won't benefit from lower repayments
• Refinancing restrictions: Investment loan refinance options are limited during the fixed period
• Higher initial rates: Fixed rates may start higher than variable rates

These restrictions can impact your ability to leverage equity from portfolio growth or make lump sum repayments when you have surplus funds. If your property investment strategy involves frequent refinancing or accessing equity for additional purchases, a fixed rate term might not align with your goals.

Comparing Fixed and Variable Investment Loan Products

Understanding the difference between fixed and variable rate structures is crucial for your investment property rates decision. Variable rate loans offer flexibility that fixed rates don't, including:

• Unlimited additional repayments
• Access to offset accounts and redraw facilities
• More favourable investment loan refinance conditions
• Potential rate discount benefits
• Access to equity release without break costs

However, variable interest rates can increase, potentially affecting your negative gearing benefits and passive income calculations. Many property investors choose a split loan structure, combining both fixed and variable portions to balance stability with flexibility.

Interest Only vs Principal and Interest

When considering fixed rate investment loan options, you'll also need to decide between interest only and principal and interest repayments. Interest only investment loans are popular among property investors because:

• Lower repayments improve cash flow
• Larger tax deductions as more of the payment is tax-deductible interest
• Ability to direct funds toward other investments or investor deposits on additional properties

Typically, interest only periods last between one and five years. After this period, the loan converts to principal and interest repayments, which will be higher as you're paying down the loan amount.

Principal and interest repayments build equity in your rental property loan faster but reduce your claimable expenses for tax purposes. Your choice should align with your overall property investment strategy and financial freedom goals.

Key Factors Affecting Your Investment Loan Application

When applying for fixed rate property investment loan products, lenders assess several factors:

• Loan to value ratio (LVR): A lower LVR may secure better investor interest rates and avoid Lenders Mortgage Insurance (LMI)
• Rental income: Lenders typically assess 80% of expected rental income due to vacancy rate considerations
• Investor borrowing capacity: Your ability to service the loan alongside existing debts
• Investor deposit: Generally 20% minimum, though some lenders accept lower deposits with LMI
• Property type: Body corporate properties may have different lending criteria

Understanding these factors and preparing your investment loan application thoroughly increases your chances of securing favourable terms for your investment property finance.

Maximising Your Investment Loan Benefits

Regardless of whether you choose a fixed rate term, several strategies can enhance your investment returns:

• Maximise tax deductions: Ensure all claimable expenses including interest, property management fees, and maintenance are claimed
• Consider negative gearing benefits: If rental income is less than expenses, the loss can offset other taxable income
• Factor in stamp duty: Include this cost in your initial investment calculations
• Review loan features: Some investment loan features can add value even with fixed rates
• Plan for fixed rate expiry: Prepare your refinancing strategy before your fixed term ends

Property investors who understand both the tax benefits and investment loan benefits are better positioned to achieve building wealth property goals and generate sustainable passive income.

Making the Right Choice for Your Investment

Choosing between fixed and variable investment loan products depends on your individual circumstances, risk tolerance, and investment timeline. Fixed rate terms suit investors who:

• Prioritise repayment certainty over flexibility
• Anticipate interest rate increases
• Don't plan to refinance during the fixed period
• Have stable income and don't need to make additional repayments
• Are comfortable with the investment loan amount and loan structure

Conversely, variable rates may suit those who want maximum flexibility, plan active portfolio growth, or anticipate rate decreases.

Working with an experienced mortgage broker who understands property investor loan options across multiple lenders helps you access the most suitable investment loan products for your situation. Different lenders offer varying interest rate discounts, investment loan features, and investor deposit requirements.

The right investment loan can significantly impact your ability to build wealth through property investment. Whether you're purchasing your first rental property loan or expanding an existing portfolio, understanding fixed rate loan terms empowers you to make informed decisions aligned with your financial freedom objectives.

Call one of our team or book an appointment at a time that works for you to discuss your investment loan options and develop a property investment strategy tailored to your goals in Bass.