Investment Loans: Fixed Rates and Extra Repayments

If you fix the rate on an investment loan, you usually lock yourself out of making extra repayments without a cost.

Most fixed rate investment products allow between zero and $10,000 in additional repayments per year. Go over that limit and the lender will charge you break costs, which can run into thousands of dollars depending on how much rates have moved since you locked in. The structure works differently to a standard variable loan, where you can pay as much or as little as you like without penalty.

Why Fixed Rate Investment Loans Restrict Extra Repayments

Lenders fund fixed rate loans by borrowing wholesale money at a locked rate for the same term. When you break that agreement by repaying early, the lender is left holding wholesale debt it can no longer match with your loan. The break cost is the lender's calculation of what it loses by having to replace your fixed rate loan with a lower-rate loan in a falling rate environment.

In our experience, most investors choose fixed rates to lock in certainty around cash flow rather than to aggressively pay down debt. But circumstances change. A property might sell, rental income might improve, or you might want to access equity while rates are still favourable. At that point, the fixed rate becomes a constraint rather than a benefit.

What Counts as an Extra Repayment

Any payment above your scheduled minimum counts toward your annual extra repayment limit. That includes lump sums from savings, tax refunds, rental income top-ups, or even regular additional payments set up through direct debit.

If your loan is interest-only, which most investment loans are during the initial period, your scheduled repayment is just the interest component. Any payment toward principal is an extra repayment. If your loan is principal and interest, any amount above the scheduled monthly repayment is treated as extra.

Consider an investor in Waratah who fixed a $500,000 loan at 5.8 per cent on an interest-only basis. The scheduled monthly repayment is around $2,417. If they decide to add $500 a month from rental income, that $6,000 a year stays within the typical $10,000 annual limit. But if they receive a $20,000 inheritance and try to put it straight onto the loan, they'll trigger break costs on the $16,000 over the threshold.

How Break Costs Are Calculated

Break costs depend on three things: how much you're repaying early, how much time is left on your fixed term, and the difference between your fixed rate and the rate the lender can now lend that money at.

If rates have dropped since you fixed, break costs will be higher because the lender loses more income by replacing your loan with a new one at a lower rate. If rates have risen, break costs are usually zero, because the lender can now lend that money at a better rate than yours.

Lenders use their own wholesale funding curves to calculate the cost, so you won't be able to work it out yourself with any accuracy. Most will give you a break cost estimate over the phone, and some publish calculators on their websites. The figure is only binding on the day you actually settle the discharge or refinance, because wholesale rates move daily.

Fixed and Variable Split Structures

One way to keep some flexibility without giving up rate certainty is to split your loan between fixed and variable portions. A common approach is to fix 50 to 70 per cent of the loan and leave the rest variable.

The variable portion lets you make unlimited extra repayments, redraw funds if the loan allows it, and refinance that portion without penalty. The fixed portion gives you known repayments and protection against rate rises. You're essentially spreading your risk across both rate environments.

In a scenario where a Waratah investor borrows $600,000 to buy a property near Lambton Road, they might fix $400,000 for three years at 5.9 per cent and leave $200,000 variable at 6.3 per cent. If they want to make $30,000 in extra repayments over two years, they direct it all to the variable portion and avoid any break cost. If they need to refinance the whole loan before the fixed term ends, they only wear the break cost on the $400,000, not the full $600,000.

Refinancing a Fixed Rate Investment Loan

If you want to refinance before your fixed term expires, you'll usually face the same break cost as if you were repaying the loan in full. That cost is deducted from your payout figure when the new lender settles your loan.

Some lenders will let you port a fixed rate loan to a new property if you're selling and buying at the same time, but the rules are strict. The loan amount usually has to stay the same or reduce, the new property has to settle within a short window of the old one, and the fixed rate and remaining term carry over unchanged. It's not common in practice, and it rarely suits investors who are selling one property and buying another at a different price point.

Refinancing still makes sense if the benefit outweighs the break cost. If you can drop your rate by 0.5 per cent or more, access better loan features, or pull out equity for another purchase, the upfront cost might be worth it. A broker can run the numbers and get break cost estimates from your current lender before you commit.

What Happens at the End of the Fixed Term

When your fixed term ends, your loan automatically rolls to the lender's standard variable rate unless you take action. That rate is usually higher than both the fixed rate you had and the variable rate the lender advertises to new customers.

You have three choices: lock in another fixed term, move to the lender's variable rate with any negotiated discount, or refinance to another lender. Most investors either refinance or negotiate a new rate at this point, because the standard variable rate is rarely the lowest option available.

You won't face any break costs once the fixed term has expired, so it's the cleanest time to move or restructure. If you're planning to sell the property, access equity, or change your loan structure, doing it at the end of a fixed term saves you thousands in exit costs.

Interest-Only Loans and Extra Repayments

Most investment loans in the first five to ten years are interest-only, meaning your repayments cover only the interest charged each month. You're not required to pay down the loan balance, and many investors prefer this because it keeps repayments lower and maximises the tax deduction on interest.

But interest-only doesn't mean you can't make extra repayments. You're still allowed to pay down principal if you want to, subject to the extra repayment limits on a fixed rate loan. On a variable interest-only loan, you can usually pay as much as you like toward principal without restriction.

The difference is that extra repayments on an interest-only loan don't reduce your scheduled repayment amount. If you're paying $2,400 a month in interest and you put an extra $10,000 onto the loan, your next month's repayment is still $2,400, but the interest portion will be slightly lower because your balance has dropped. On a principal and interest loan, extra repayments can sometimes reduce your scheduled amount or shorten your loan term, depending on how the lender applies them.

Call one of our team or book an appointment at a time that works for you. We'll walk through your current loan structure, check whether fixing or splitting makes sense for your situation, and get break cost estimates if you're thinking about refinancing before a fixed term ends.

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