Investment Loans and Fixed Rates: Avoid These Mistakes

Locking in a fixed rate on your investment loan can look appealing when rates are moving, but the decision changes depending on whether you're buying your first rental property, expanding a portfolio, or preparing for retirement.

A fixed rate investment loan gives you certainty on repayments for a set period, usually between one and five years. That certainty comes with trade-offs: reduced flexibility, potential break costs if you need to exit early, and fewer offset or redraw features compared to variable products. The appeal of locking in a rate shifts at different life stages because your priorities shift. A first-time investor borrowing close to 90 per cent loan to value ratio (LVR) has different cash flow pressures than someone with three properties and surplus equity. Understanding how fixed rate products fit your stage, not just your rate anxiety, matters more than the headline number.

First Investment Property: When Cash Flow Certainty Matters Most

If you're borrowing for your first investment property and holding a full-time job, fixed repayments help you manage cash flow while you adjust to being a landlord. You know what leaves your account each month, vacancy periods are easier to budget for, and there's no surprise if the Reserve Bank lifts rates.

Consider a buyer purchasing their first rental property in Baldivis with a 10 per cent deposit. They're borrowing on an interest-only basis to keep repayments lower while building equity in their owner-occupied home. Fixing the investment loan for two years at the start means repayments don't move during the period when unexpected costs, such as strata levies, repairs, or tenant turnover, are hardest to absorb. The downside is that if rates fall or they want to refinance to access better investor interest rates, break costs can wipe out any benefit. For a first property with limited equity and a tight deposit buffer, a shorter fixed term or a split between fixed and variable gives some certainty without locking you in completely.

The negative gearing changes taking effect from 1 July 2027 add another layer. Properties purchased after 7:30pm AEST on 12 May 2026 that are not eligible new builds will have rental losses quarantined from 1 July 2027. You can still deduct interest and other expenses, but losses can only offset other rental income or be carried forward. If you fixed your investment loan before that announcement and your strategy relied on offsetting losses against salary, you need to review whether the loan structure still works. A two or three-year fixed term rolling into 2028 or 2029 means you'll be managing the loan under the new rules when the fixed period ends.

Mid-Career Investors: Portfolio Growth and the Split Strategy

Once you own two or three properties and have equity to leverage, your focus shifts from cash flow protection to portfolio growth and flexibility. Fixed rates still have a place, but locking in your entire borrowing limits your ability to move quickly when the next opportunity appears.

A split loan strategy, where part of your borrowing is fixed and part remains variable, lets you lock in a portion of repayments while keeping access to features like offset accounts and the ability to make extra repayments without penalty. Many investors at this stage hold variable portions in offset to park rental income and reduce interest, while fixing a percentage to smooth repayments across the portfolio. The exact split depends on your risk tolerance and how actively you manage the loans, but a 50/50 or 60/40 split between variable and fixed is common.

The debt-to-income cap introduced in February 2026 also affects mid-career investors adding properties. Lenders can only write 20 per cent of new investor loans at six times income or above, which means if your borrowing is approaching that threshold, you'll face either a lower loan amount or higher interest rate loadings. Fixing part of a new loan at a higher rate because of DTI restrictions removes flexibility later if rates fall or your income increases. Investors expanding portfolios in this environment often choose shorter fixed terms, one or two years, to avoid being locked into less favourable terms for too long.

Pre-Retirement: Reducing Debt and Managing Interest Rate Risk

If you're within ten years of retirement and your goal is to reduce debt before your income drops, fixing the rate on an investment loan can work against you unless you're confident you won't make lump sum repayments. Many investors at this stage want to pay down principal faster, sell a property to consolidate, or refinance to release equity. Fixed rate products typically restrict extra repayments to $10,000 or $20,000 per year without penalty, and breaking the loan early to sell or refinance can trigger break costs that exceed any rate saving.

An investor holding two properties in Wanneroo and Mandurah, both with principal and interest loans, might prefer keeping both on variable rates as they approach retirement. Rental income covers most of the repayments, and they plan to sell one property within three years to pay down the other. Fixing either loan would complicate that plan. If they fixed for three years and decided to sell in year two, the break cost could be several thousand dollars depending on rate movements. Variable rates give them the flexibility to sell, pay down, or refinance without penalty.

The new CGT indexation rules from 1 July 2027 also affect sale timing for pre-retirees. Gains accrued before 1 July 2027 still receive the 50 per cent discount under current rules. Gains after that date move to cost base indexation and a 30 per cent minimum tax rate on real gains. If you're planning to sell an investment property in the next few years, locking in a fixed rate that extends beyond your intended sale date adds unnecessary risk. You may be forced to hold longer to avoid break costs, which could push part of the capital gain into the new indexation regime.

Refinancing Investment Loans: When to Avoid Fixed Rates

If you're refinancing an existing investment loan to access better investor interest rates or to release equity for another purchase, fixing the new loan immediately can limit your options. Most refinances involve some adjustment period where you're tweaking loan amounts, reviewing your borrowing capacity, or deciding whether to keep the loan interest-only or switch to principal and interest.

Refinancing also tends to happen when you've identified a rate or product advantage. Locking that advantage into a fixed term assumes the benefit will hold for the full fixed period. If the market shifts, or if another lender offers a lower rate 12 months later, you're stuck unless you're prepared to pay break costs again. Many investors refinancing choose variable initially, then consider fixing after six to twelve months once the loan is settled and the strategy is clear.

Another consideration: if you're refinancing to consolidate debt or access equity under the DTI cap, fixing immediately reduces your ability to make extra repayments from future income growth or asset sales. The cap already limits how much you can borrow, so fixing removes another layer of flexibility you might need.

Interest-Only Fixed Rates and the Vacancy Buffer

Most investment loans in WA are written on an interest-only basis for the first one to five years. Fixing the rate during the interest-only period gives you predictable repayments, but it also means you're not reducing debt. If rental income drops due to a vacancy or tenant issue, you still owe the full fixed repayment with no option to reduce it temporarily.

Vacancy rates vary across Perth, and some suburbs see longer gaps between tenants. If you're fixing an interest-only loan on a property in a suburb with a higher vacancy rate, factor in at least two months of holding costs without rental income. A fixed repayment that looks manageable with full rent can become a problem when the property sits empty and you can't adjust the loan structure or make early repayments to reduce the balance.

The interest-only period eventually ends, and the loan reverts to principal and interest unless you apply to extend it. If your fixed term runs past the end of the interest-only period, your repayments will jump when the loan converts, even though the rate is still fixed. Lenders don't always make this clear upfront, and the combination of a fixed rate and a switch to principal and interest can catch investors off guard. Aligning your fixed term with the interest-only period, or choosing a variable product for the principal and interest phase, avoids that surprise.

When Fixing Works: Stable Income and Holding for the Long Term

Fixed rates suit investors with stable income, low immediate plans to sell or refinance, and a long hold strategy. If you're buying a new build investment property that qualifies for continued negative gearing under the 2027 rules, and you plan to hold it for ten years or more, fixing part of the loan for three to five years can smooth repayments during the early high-expense phase.

Eligible new builds, defined as dwellings on previously vacant land or developments that increase dwelling numbers, retain access to full negative gearing and the option to elect the 50 per cent CGT discount. That makes them more attractive for long-term investors, and fixing the rate early in the hold period reduces repayment risk while the property appreciates. The investor can offset rental losses against other income during the fixed term, and by the time the loan reverts to variable, the property may be positively geared or close to it.

Shorter fixed terms, one or two years, also work when you expect rates to stabilise but want protection against a short-term rise. The risk is lower because break costs on a shorter term are smaller, and you're not committing to a rate for a period longer than your planning horizon.

If you're weighing up your investment loan options and trying to work out whether fixing suits your stage, call one of our team or book an appointment at a time that works for you. We work with clients across Perth and WA, and we can walk through your current position, your goals, and how different loan products and rate structures fit your next move.

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