Fixed Rate Investment Loans and Extra Repayments

Most fixed rate investment loans do not allow extra repayments without penalties.

If you lock in a fixed rate on an investment property loan, you gain certainty over your borrowing costs for the fixed period, but you also lose the ability to pay down the loan ahead of schedule. Lenders typically allow small additional payments, often capped at $10,000 to $30,000 per year depending on the product, but any amount above that cap triggers break costs. For investors holding property in the ACT, where rental income can fluctuate with vacancies or tenant turnover, that lack of flexibility can create problems if you suddenly have surplus cash and want to reduce debt.

Why Fixed Rate Loans Restrict Extra Repayments

Lenders price fixed rate loans by locking in their funding cost for the fixed term. When you pay extra, the lender loses the interest income they had factored into that funding arrangement. Break costs are the mechanism they use to recover that lost income. The calculation considers the difference between your fixed rate and the rate the lender can now earn on the funds you have repaid early, multiplied by the remaining fixed term. If current rates are lower than your fixed rate, the break cost will be substantial. If rates have risen, the break cost may be zero or minimal.

For investment loans specifically, the interaction with tax deductions adds another layer. Interest on borrowings for rental property is deductible, so paying down the loan early reduces your deductions in future years. That might sound counterintuitive, but if you plan to borrow again for another investment or even for personal use, you are better off maintaining the deductible debt and using surplus funds elsewhere, such as in an offset account against a non-deductible loan.

Split Loan Structures for Investment Property

A split loan structure divides your total borrowing into two or more portions, with each portion on a different rate type. One portion might be fixed, giving you certainty over a core amount of repayments, while the other portion remains variable, allowing extra repayments without penalty. This approach is common among property investors across the ACT who want to hedge against rate rises but still retain flexibility to reduce debt if rental income is strong or if they receive a windfall.

Consider a buyer who purchases a two-bedroom unit in Kingston as an investment property. Rental demand is high due to proximity to Manuka, the parliamentary triangle and public transport, but vacancy periods still occur. The buyer borrows on a split structure: 60 per cent of the loan fixed for three years at a slightly lower rate, and 40 per cent on a variable rate. During tenanted periods, rental income covers the minimum repayments on both portions. When the property is between tenants or when the investor receives a work bonus, they direct extra funds to the variable portion only. The fixed portion remains untouched, avoiding break costs, while the variable portion reduces steadily. Over three years, the variable portion is paid down substantially, and when the fixed term ends, the investor refinances the remaining fixed portion or converts it to variable.

Interest-Only Fixed Loans and Lump Sum Flexibility

Interest-only loans are structured so that your required repayment each period covers only the interest charge, with no reduction to the principal balance. For investment property, interest-only loans are often used to maximise tax deductions and preserve cash flow, since the entire interest payment is deductible and the lower repayment frees up cash for other investments or deposits on additional properties.

When you fix an interest-only investment loan, the restrictions on extra repayments become even more pronounced. Because the loan is interest-only, any extra payment you make is a principal reduction, which the lender does not expect during the interest-only period. Most lenders will allow you to make that principal payment, but you cannot redraw it, and if you exceed the annual cap, break costs apply just as they would on a principal-and-interest fixed loan.

If your goal is to preserve flexibility, an interest-only variable loan is usually the better choice. You can make lump sum payments to reduce the principal at any time, and if the loan product includes redraw, you can access those funds again if needed. That redraw feature is particularly useful for investors building a portfolio, since it allows you to pull equity out for the next deposit without formally refinancing. Just be aware that redrawing principal from an investment loan does not automatically make the redrawn funds deductible for a new purpose. The deductibility depends on what you use the redrawn funds for, not where they came from.

What Happens If You Break a Fixed Rate Early

Break costs are calculated by the lender and disclosed to you before you proceed. The formula is not transparent across all lenders, but it generally follows the principle outlined earlier: the lender compares your fixed rate to the current wholesale rate they can earn for the remaining fixed term, then multiplies the difference by your outstanding balance and the time left on the fixed period.

If you are two years into a five-year fixed term and rates have fallen significantly, your break cost could run into tens of thousands of dollars. If rates have risen, the break cost might be zero. Some lenders waive break costs if you are refinancing internally to another loan product with the same institution, but that waiver is not universal and usually only applies to owner-occupied loans, not investment loans.

For investors in the ACT, refinancing at the end of a fixed term is often the point at which you reassess your loan structure. You might choose to refix if rates are favourable, move entirely to variable for flexibility, or set up a new split. If you are holding multiple properties, coordinating the fixed rate expiry dates across your portfolio can give you regular opportunities to adjust your overall debt strategy without incurring break costs.

Using an Offset Against a Fixed Investment Loan

Most fixed rate loans do not offer an offset account. Variable rate loans typically do, and the offset allows you to park surplus cash in a linked transaction account where it reduces the balance on which interest is calculated, without formally paying down the loan. For investment loans, this creates a tax problem: if you use an offset account against an investment loan, you reduce the interest charged, which in turn reduces your deductible interest expense. If the cash sitting in the offset account is genuinely surplus to your needs, that is fine. But if you plan to use that cash for personal purposes, you are effectively converting deductible debt into non-deductible debt, which is the opposite of what most investors want.

A better structure is to use an offset account against a non-deductible loan, such as your own home loan, while keeping your investment loan separate and paying only the minimum repayment on it. That way, the investment loan interest remains fully deductible, and the offset reduces the non-deductible interest on your home. If you do not have a home loan, or if your home is paid off, holding surplus cash in an offset against an investment loan might still be worthwhile if you expect to need that cash in the near term and do not want it locked away in the loan principal.

Variable vs Fixed for Long-Term Investment Strategy

The choice between variable and fixed rates for investment property depends on your tolerance for repayment volatility and your plans for the loan over the next few years. A variable rate gives you full flexibility to make extra repayments, access redraw if available, and adjust your repayment strategy as rental income or your personal financial situation changes. Variable rates also mean your repayments will move with the market, so if the Reserve Bank raises rates, your repayments increase, and if rates fall, your repayments decrease.

Fixed rates give you certainty, which can be valuable if you are managing cash flow across multiple properties or if you are approaching retirement and want predictable expenses. But that certainty comes at the cost of flexibility, and if your circumstances change during the fixed period, such as receiving an inheritance, selling another asset, or deciding to sell the investment property itself, you may face break costs.

In our experience, investors who plan to hold a property for the long term and who have stable income often benefit from a split structure or from fixing only a portion of the loan. Investors who are actively building a portfolio and expect to refinance or restructure within a few years usually prefer variable rates across the board. There is no universal answer, and the legislation changes introduced from the 2027-28 income year, which limit negative gearing deductions on certain properties acquired after May 2026, add another variable to the decision. Properties acquired under the new rules may be held for longer to allow carried-forward losses to be used, which might tilt the balance toward longer fixed terms for some investors.

Call one of our team or book an appointment at a time that works for you. We can run scenarios based on your specific property, rental income and broader financial position, and we have access to investment loan options from banks and lenders across Australia, including products designed for ACT property investors.

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