Proven tips to use fixed rates and extra repayments wisely

A fixed rate investment loan gives you certainty, but extra repayments can trigger break costs or reduce your tax deductions without adding real value.

Most lenders allow limited extra repayments on a fixed investment loan, typically up to $10,000 or $30,000 per year depending on the product. Go beyond that limit and you'll face break costs, which can run to thousands of dollars if rates have fallen since you locked in. But even within the allowed limit, paying down an investment loan early might not suit your strategy if your goal is to maximise tax deductions and use equity elsewhere.

Why fixed rates appeal to property investors

Fixed rates protect you from rate rises during the fixed period, making cash flow predictable. Rental income covers a known portion of your repayments, and you can plan around the gap without worrying about a sudden serviceability squeeze.

We regularly see investors choose a fixed rate when they've stretched borrowing capacity or when vacancy rates in their area are higher than usual. Locking in a rate for two or three years means you're not relying on uncertain rental income to absorb rate movements you can't control.

Some investment loan products allow you to fix a portion and leave the rest variable, which gives you rate protection on part of the debt while keeping flexibility on the other. That split can work well if you're planning to use equity for a second purchase within the fixed period.

How extra repayments interact with fixed rate products

Most lenders cap extra repayments on fixed rate loans at between $10,000 and $30,000 per year. If you exceed that limit, the lender calculates a break cost based on the economic loss they incur from your early repayment.

Break costs depend on the difference between your fixed rate and the lender's current wholesale funding cost. If rates have dropped since you locked in, the lender loses income and passes that cost to you. If rates have risen, there's usually no break cost.

Consider an investor who fixed a $600,000 loan at 5.8 per cent for three years, then wanted to pay down $100,000 in year two after selling another asset. At that point, wholesale rates had fallen to 4.9 per cent. The lender applied a break cost of around $4,200, calculated on the difference between the contracted rate and the current cost of funds over the remaining 12 months. The investor chose to hold the cash in offset against a separate variable loan instead, avoiding the penalty and preserving flexibility.

Tax treatment when you reduce an investment loan balance

Interest on an investment loan is deductible because the borrowing is used to produce assessable income. When you make extra repayments, you reduce the loan balance and therefore reduce the deductible interest you pay going forward.

Under the rules applying from 1 July 2027, net rental losses on most residential investment properties acquired after 12 May 2026 are quarantined and can only be offset against other residential rental income or carried forward. For those properties, reducing your loan balance early means smaller deductions and a larger quarantined loss that sits idle unless you have other rental income to absorb it. Properties held before that date continue under the existing rules, where rental losses can be offset against salary or other income.

If your investment strategy relies on negative gearing to reduce taxable income now, paying down the loan works against that. If your strategy is to build equity and minimise total interest over time, then paying down the loan makes sense, but only if you're not penalised by break costs or sacrificing flexibility you'll need in the next 12 months.

Split rate structures and how they preserve flexibility

A split rate loan lets you fix part of your borrowing and leave the rest on a variable rate. The variable portion typically allows unlimited extra repayments and full redraw or offset access, while the fixed portion gives you rate certainty.

In a scenario like this, an investor borrowing $500,000 might fix $350,000 for three years and leave $150,000 variable. Extra repayments go onto the variable portion, reducing interest without triggering break costs. If rates rise during the fixed period, the investor is protected on 70 per cent of the debt. If rates fall, the variable portion benefits immediately and the investor can refinance the fixed portion at the end of the term without penalty.

Split structures work particularly well if you're planning to access equity within the fixed period. You can draw against the variable portion without disturbing the fixed loan, keeping your rate protection intact while maintaining access to funds for portfolio growth or other purposes.

When it makes sense to pay extra on a fixed investment loan

Paying extra on a fixed investment loan makes sense in limited scenarios. If you're within the annual cap, have surplus cash you won't need for another purchase, and your goal is to reduce total interest rather than maximise deductions, then extra repayments can work.

But if you're likely to need that cash back within the fixed term, check whether the product allows redraw. Many fixed rate loans do not. Once the money is paid in, it's locked until the fixed period ends. If you need funds before then, you'll either need to apply for a top-up (which may not be approved) or refinance the entire loan and pay break costs.

Another scenario where extra repayments suit investors is where the property is already positively geared and the investor wants to reduce debt ahead of retirement or another life change. In that case, the tax benefit of ongoing interest is small, and paying down the loan reduces future repayments without affecting current cash flow.

What happens at the end of the fixed period

When your fixed period ends, the loan automatically reverts to the lender's standard variable rate unless you act. That revert rate is usually higher than the best variable rate available in the market, and often higher than new fixed rates as well.

This is the moment to review your investment loan and consider refinancing or negotiating a new rate with your existing lender. If you've been prevented from making extra repayments during the fixed term, you can now do so without penalty, or switch to a product with offset or redraw if those features suit your strategy going forward.

Many investors also use the end of a fixed term to reassess their overall structure. If you've built equity in the property, you might release some of that equity to fund another purchase. If your circumstances have changed and you no longer need rate certainty, switching to a variable loan with full offset access might reduce your interest cost and give you more control over cash flow.

Comparing variable and fixed investment loan features

Variable rate investment loans typically allow unlimited extra repayments, full offset account access, and no break costs if you refinance or pay out the loan. The rate moves with the market, which can increase your repayments if the Reserve Bank lifts rates, but also means you benefit immediately if rates fall.

Fixed rate loans lock your rate for a set term, usually one to five years. Repayments stay the same regardless of market movements. Most fixed products cap extra repayments, and many do not offer offset accounts or redraw. If you need to exit early, break costs apply unless market rates have risen above your fixed rate.

For investors who value certainty and are confident they won't need to access equity or make large extra repayments during the fixed term, a fixed rate can be a useful tool. For those who want flexibility, control over cash flow, and the ability to adapt their strategy as opportunities arise, a variable rate or split structure usually fits the brief.

Call one of our team or book an appointment at a time that works for you. We'll walk through your current loan structure, your plans for the next few years, and the features that will give you the flexibility and cost control that match where you're headed.

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