Beginner's Guide to Fixed Rate Investment Loan Costs

A fixed rate investment loan costs more than the rate on the front page. Break costs, feature limits and lender fees can matter just as much, so check them before you sign.

You measure twice before you cut, and the same rule applies to a property investment loan. This guide covers the costs that sit behind a fixed rate, written for carpenters weighing up buying an investment property.

What Costs Come With a Fixed Rate Investment Loan?

A fixed rate investment loan can carry upfront fees, ongoing fees, possible break costs and feature limits on top of the interest. These differ between lenders and products, so the product disclosure documents and fee schedule are where you find the real numbers.

If you borrow above 80 per cent of the property's value, lenders mortgage insurance (LMI) is generally required. The borrower pays the premium. Depending on where you live, stamp duty may also apply to that premium. Borrowing at or under 80 per cent is a lender policy line, not a legal limit, and what happens above it depends on both the lender and the insurer. If you work in the trades, ask whether an LMI waiver is on offer. Whether you qualify is up to each lender.

The trade-off with any fixed rate is certainty on repayments in return for less flexibility. That is a fair deal for some investors and a poor one for others.

Fixed Rate Break Costs: Ask for the Calculation Before You Sign

Break costs can apply if you repay a fixed loan, refinance it or sell the property before the fixed term ends. Each lender sets its own method, so ask for the calculation in writing before you commit.

Consider a carpenter who fixes an investment loan for a set term. Partway through, a better-paying job opens up interstate and the carpenter decides to sell the rental. The loan has to be paid out before the fixed term finishes. In a scenario like this, the lender issues a payout figure that includes a break cost on top of the loan balance. The carpenter had asked for the break cost method before signing, so the figure was no surprise. The sale price had room to cover it, and the move went ahead without a hit to the budget.

The lesson is to ask three things up front. How is the break cost worked out? Can you get an estimate at any time? Does a part-term exit cost the same as a full exit? If you are already on a fixed loan that is close to ending, our fixed rate expiry page covers what happens next.

Do Fixed Rate Investment Loans Allow Extra Repayments or an Offset Account?

Sometimes, but it depends on the lender and the product. Confirm in writing whether a fixed loan or a fixed portion of a split loan allows extra repayments, redraw or an offset account.

This matters for your tax and your cash flow. An offset account reduces the balance interest is charged on, so the interest you pay is lower and so is the interest you can claim. You keep more cash and claim a smaller deduction. A fixed loan with no offset means spare cash sits in a separate account, where it may earn less than the loan costs. That is the cost of locking in.

A split loan, with part fixed and part variable, is one way to keep some flexibility. Ask whether you can move money between the two parts, because lenders handle that differently.

Fixed Rate Interest Only: What It Does to Your Borrowing

Choosing interest only on a fixed investment loan does not lift your borrowing power. ADIs regulated by APRA generally assess an interest-only loan on principal and interest repayments over the remaining term after the interest-only period. Other lenders set their own policies.

Banks, credit unions and building societies regulated by APRA must also test new borrowers at a rate at least 3 percentage points above the loan rate. As an illustration, at a 6.75% p.a. loan rate, the test rate would be 9.75% p.a. Non-bank lenders are not bound by that buffer, but they have their own credit policies.

When it comes to rent, APRA's guidance says prudent ADI serviceability policies should count no more than 80 per cent of expected rent, to allow for periods without a tenant. Other lenders set their own rental policies.

The trade-off with interest only is that the balance does not fall. You pay the same interest on the full amount, and when principal repayments start, they are higher because they are spread over a shorter term. Our interest only loans page goes through the structure in more detail.

Tax on a Fixed Rate Investment Loan: What You Can and Can't Claim

Interest on money borrowed to buy a rental property is deductible to the extent the property is rented or available for rent. The principal part of a repayment is not deductible, and the same goes for interest on money borrowed for private use.

That last point matters if you ever redraw. The ATO looks at how borrowed money is used each time it is drawn down. If you redraw from the loan to pay for a ute or a holiday, the interest on that part is private and not deductible, even though the loan is secured by the rental.

Negative gearing rules for residential investment properties have changed, and the treatment depends on when you bought and whether the property is an established home or an eligible new build. Speak to your accountant about how this applies to you before you decide on a loan structure. Do not assume a tax outcome until they have confirmed it.

Matching the Loan to Your Plans

Before choosing a fixed rate, work out how long you plan to hold the property and whether you might refinance. Fixing suits a buyer who wants stable repayments and is unlikely to sell or refinance early. If you want to pay the loan down fast, or you may sell, a variable rate or a split loan may fit better. Check the details on our investment loans page, and use our borrowing capacity tools to see where you stand.

If you are a carpenter and want to talk through your options, our home loans for carpenters page explains how we work with your trade income. We can also compare lenders for you through Finance for Tradies and Home Loans for Tradies.

Call one of our team or book an appointment at a time that works for you, and we will go through the fees, break costs and features on any fixed rate investment loan before you commit.

Frequently Asked Questions