What are Fixed Rate Investment Loans and How They Work

A fixed rate investment loan lets you lock your interest rate for a set period, typically between one and five years.

That certainty matters when you're relying on rental income to cover most of the repayment and want to protect your household budget from rate rises. For Mentone investors holding property close to home or in growth areas further out, fixing part or all of your borrowing can remove the guesswork from cashflow planning.

Why Mentone Investors Consider Fixed Rates

Mentone sits in a pocket where owner-occupiers and investors overlap. Properties near the train line and foreshore attract consistent rental demand from professionals and young families who value the bayside lifestyle without the Brighton price tag. When you're buying into a stable rental market like this, knowing your repayment won't shift for three or five years lets you plan around school fees, renovations, or a second purchase without second-guessing every Reserve Bank announcement.

Fixed rates also create breathing room if you're stretching to make the numbers work. Consider an investor who picks up a two-bedroom unit within walking distance of Mentone station. Rental income covers most of the interest-only repayment, but not all of it. A variable rate that climbs by half a percent could turn a manageable shortfall into one that forces a rethink. Fixing the rate for three years locks that gap in place and gives you time to build equity or increase rent in line with the market.

How Fixed Rate Investment Loans Differ From Variable Loans

A fixed rate investment loan charges the same interest rate for the agreed term, regardless of what happens to the official cash rate or your lender's variable rate. Your repayment stays the same each month, so you know exactly what's leaving your account and what you need from rent to keep the property cashflow neutral or close to it.

Variable rates move with the market. When rates fall, your repayment drops. When they rise, so does your cost. That flexibility works well if you plan to make extra repayments or pay the loan down faster, but it introduces uncertainty that doesn't suit every investor's risk appetite or life stage. Investment loans in general give you access to both structures, and many lenders let you split the loan so part is fixed and part is variable.

Interest-Only Repayments on a Fixed Investment Loan

Most investment loans, whether fixed or variable, offer an interest-only period. During this time, you pay only the interest charged each month without reducing the loan balance. That keeps your repayment lower and maximises the amount you can claim as a deduction against rental income.

Interest-only periods usually run for one to five years, and you can often renew them if your circumstances and the lender's policy allow it. Once the interest-only period ends, the loan reverts to principal and interest unless you negotiate an extension. If you're on a fixed rate when that happens, your repayment will jump because you're now paying down the loan balance as well as covering interest. Planning for that change before it arrives keeps your cashflow predictable.

When Fixing Makes Sense and When It Doesn't

Fixing works well when you want certainty and you're happy to trade some flexibility for it. If rates are low or rising, locking in a rate protects you from further increases. If your household budget is tight or you're managing multiple properties, fixed repayments remove one variable from your monthly cashflow.

Fixing doesn't suit every scenario. If you think rates will fall, you'll be stuck paying the higher fixed rate while variable borrowers benefit from the drop. Fixed loans also limit how much you can repay early without triggering break costs, which are fees charged by the lender to compensate for the difference between your fixed rate and the current market rate. If you're planning to sell the property or refinance within the fixed term, those costs can be significant. We regularly see investors who fixed at what seemed like the right time, only to face a change in circumstances that made the inflexibility costly.

The Split Rate Strategy

Splitting your loan between fixed and variable gives you some rate protection without locking the entire amount. You might fix 50 or 60 percent of the loan for three years and leave the rest variable. That way, if rates fall, you benefit on the variable portion. If they rise, the fixed portion shields you from the full impact.

Splits also preserve flexibility. The variable portion lets you make extra repayments or access an offset account if your lender offers one, while the fixed portion keeps your minimum repayment stable. In our experience, splits suit investors who want a middle path between certainty and adaptability, particularly those in Mentone who are juggling family expenses with portfolio growth and don't want to be caught either way.

What Happens When Your Fixed Rate Ends

When the fixed term finishes, your loan automatically rolls to your lender's standard variable rate unless you choose a new fixed term or refinance to a different lender. The standard variable rate is almost always higher than the discount variable rate offered to new customers, so if you do nothing, you'll likely be paying more than you need to.

The time to act is about three months before the fixed term ends. That gives you enough time to compare offers, get your paperwork together, and lock in a new rate before the old one expires. If your property has increased in value or you've paid down some of the loan, your loan-to-value ratio may have improved, which can open up better pricing.

How Lenders Price Fixed Investment Loans

Lenders set fixed rates based on the cost of funding in the wholesale market, not the Reserve Bank cash rate. That's why fixed rates don't always move in step with variable rates. Investment loans attract a higher rate than owner-occupied loans because lenders apply a higher risk weight to them under APRA's prudential standards. The pricing gap is usually between 0.25 and 0.60 percent, depending on the lender and your deposit size.

Your loan-to-value ratio also affects the rate. Borrowing at 70 percent LVR will get you a lower rate than borrowing at 90 percent, and if your LVR is above 80 percent, you'll also pay Lenders Mortgage Insurance. LMI is a one-off premium that protects the lender if you default, and it's calculated as a percentage of the loan amount. For investment loans at higher LVRs, the premium can add thousands to your upfront cost.

Application and Approval for Fixed Rate Investment Loans

Applying for a fixed rate investment loan follows the same process as any other home loan. The lender will assess your income, expenses, existing debts, and the rental income the property is expected to generate. Most lenders will only count 75 to 80 percent of the rental income when calculating your borrowing capacity, to account for vacancy periods and maintenance costs.

You'll need to provide proof of income, recent tax returns if you're self-employed, details of your deposit and how you saved it, and a contract of sale or property valuation. The lender will also run a serviceability test that assumes your loan is charged at a rate around three percentage points higher than the actual rate, to make sure you can still afford the repayment if rates rise. That buffer has been in place since late 2021 and applies to all new borrowing.

Call one of our team or book an appointment at a time that works for you. We'll walk through your scenario, compare fixed and variable options across the lenders we work with, and help you structure the loan in a way that fits your cashflow and your plans for the property.

Frequently Asked Questions