The easiest way to understand fixed rate investment loans

Why fixed rate loans matter for property investors

When you're buying an investment property, choosing between a variable rate and fixed interest rate can feel overwhelming. Many first-time property investors focus on getting the right property investment strategy but overlook how their investment loan features will impact their finances.

A fixed rate investment loan locks in your investor interest rates for a set period - typically between one to five years. This means your investment loan repayments stay the same regardless of what happens in the broader market. For someone building wealth through property, this predictability can help with budgeting and calculating investment loan repayments more accurately.

Understanding fixed rate investment loan products

Fixed rate investment loan options differ from variable interest rate products in several ways. With a fixed interest rate, you'll know exactly what you're paying each month, making it easier to forecast your passive income after accounting for rental income and claimable expenses.

However, fixed rate products typically come with restrictions on:

• Extra repayments (often capped at $10,000 to $30,000 per year)
• Redraw facilities
• Offset account access
• Early exit without break costs

These limitations exist because lenders secure fixed rates by locking in funding costs. When you break these terms, it can cost them money - costs they'll pass on to you.

The extra repayments question for investment properties

Here's where things get interesting for property investors. Should you even make extra repayments on your investment property loan?

Unlike a home loan where paying off your mortgage quickly usually makes sense, investment property finance works differently. Here's why:

Tax deductions matter: Investment loan interest rates generate tax benefits. Every dollar of interest you pay is typically tax-deductible, reducing your taxable income. This is part of the negative gearing benefits that property investors talk about.

Opportunity cost: Money used for extra repayments could potentially earn higher returns elsewhere, whether that's through portfolio growth, equity release for another property, or other investments.

Interest only investment loans: Many property investors choose interest only investment loan products specifically to maximise tax deductions and keep their investment loan repayments lower. This approach prioritises cash flow for building wealth property over reducing the loan amount.

When extra repayments might work on fixed rate investment loans

That said, there are situations where making extra repayments on your investment loan amount could make sense:

1. Reducing your loan to value ratio (LVR): If your LVR is above 80%, you're likely paying Lenders Mortgage Insurance (LMI). Extra repayments can help you reach 80% LVR faster, potentially allowing you to refinance and remove LMI costs.

2. Building equity buffer: Extra repayments increase your equity, which you can leverage equity for future investment opportunities or provide a buffer against market downturns.

3. Preparing for rate changes: If you're on a fixed rate that's about to expire, making extra repayments (within your allowed limits) can reduce the loan amount before you transition to potentially higher rates.

4. Managing vacancy rate concerns: If you're worried about periods without rental income, reducing your principal and interest payments through extra repayments provides a safety net.

Calculating the real cost of fixed rate restrictions

Before committing to extra repayments on a fixed rate investment loan, calculate what restrictions will actually cost you:

• Break costs: These can range from hundreds to tens of thousands of dollars, depending on how much rates have moved since you fixed your loan
• Lost tax deductions: Every dollar you pay off reduces your claimable expenses
• Opportunity cost: What else could that money do for your property investment strategy?

Alternative strategies for property investors

Instead of making extra repayments on your fixed rate investment property loan, consider these approaches:

Keep funds in offset or savings: If you're also paying off your own home loan, extra money might deliver better value by reducing non-deductible debt first.

Build your investor deposit for property two: Rather than paying down your current rental property loan, save towards your next investment property. This accelerates portfolio growth and potential financial freedom.

Maximise tax deductions elsewhere: Focus on other claimable expenses like body corporate fees, property management, and stamp duty costs where applicable.

Consider principal and interest vs interest only: Review whether your current loan structure aligns with your goals. Our team at Red Sea Lending can help you access investment loan options from banks and lenders across Australia to find what suits your situation.

Making the right choice for your circumstances

Every property investor's situation is different. Your investor borrowing capacity, rental income, tax position, and long-term goals all factor into whether fixed rate loans with restricted extra repayments suit you.

Before making decisions about your investment loan application or considering an investment loan refinance, it's worth getting personalised advice that considers:

• Your current loan to value ratio
• Tax benefits based on your income
• Plans for portfolio growth
• Cash flow from rental income
• Interest rate discount opportunities
• Your broader property investment strategy

At Red Sea Lending, we specialise in helping property investors understand their investment loan options. Whether you're buying an investment property for the first time or looking to expand your portfolio, we'll explain how different investment loan features and investment loan benefits apply to your specific situation.

Need help understanding which investment property rates and investment loan products work for building wealth through property? Call one of our team or book an appointment at a time that works for you. We'll review your borrowing capacity and show you the investment loan options available across multiple lenders.