Simple hacks to lock in fixed investor loan rates

Why fixed rate terms matter more for investors than owner-occupiers

Fixed rate terms on investment loans carry more risk than the same term on an owner-occupied loan because rental income and tax treatment change year to year, and most investors refinance or restructure within three to five years. Locking a rate protects your repayments from increases, but it also locks you into break costs if you need to exit early, sell the property, or access equity before the term ends.

Consider an investor who fixed a loan for five years in mid-2022 at 2.19 per cent. By late 2023, variable rates had climbed above 6 per cent, so the fixed rate looked like a win. But when that investor wanted to access equity in mid-2024 to buy a second property, the break cost quoted by the lender was close to $32,000 on a $600,000 loan. The lender calculates break costs based on the difference between your fixed rate and the current wholesale rate the bank can earn by redeploying your money, multiplied across the remaining term. The longer the remaining term, the larger the potential cost.

If your investment strategy involves portfolio growth, refinancing for better rates, or selling within a few years, a shorter fixed term or a partial fix usually makes more sense than locking the full loan amount for five years.

How partial fixing gives you flexibility without giving up protection

You can split your loan so part of it is fixed and part remains variable. A common structure is 50 per cent fixed for two or three years and 50 per cent variable. The variable portion lets you make extra repayments, redraw funds, or pay down the loan without penalty. The fixed portion protects half your repayments from rate increases.

In our experience, investors who split their loan are far more likely to refinance or restructure without facing a large break cost. If rates drop or you want to access equity, you can refinance the variable portion and leave the fixed portion untouched until it expires. If rates rise, the fixed portion keeps your cash flow predictable.

Some lenders let you fix multiple portions at different rates and terms. You might fix 40 per cent for two years, 30 per cent for three years, and leave 30 per cent variable. This spreads your exposure and gives you a portion expiring each year, which reduces the chance that all your loan comes off a fixed rate at the same time into a high variable rate environment.

What break costs actually are and when they apply

Break costs are the amount a lender charges to compensate for the loss they incur when you exit a fixed rate loan before the term ends. They apply when you refinance, sell the property, pay down a large lump sum on the fixed portion, or switch the loan from interest-only to principal and interest during the fixed period.

The calculation compares the fixed rate you are paying with the rate the lender can now earn on the money for the remaining term. If current wholesale rates are lower than your fixed rate, you pay the difference. If wholesale rates are higher, the break cost is usually zero.

Break costs are not a penalty. They are a genuine cost to the lender, which is why they vary depending on market conditions and the time left on your fixed term. A fixed rate loan with four years remaining will have a much larger break cost than one with six months remaining, assuming the rate difference is the same.

Some lenders allow small additional repayments on fixed rate loans, typically up to $10,000 or $20,000 per year, without triggering break costs. If you plan to make extra repayments from rental income or other sources, confirm the terms before you lock in a rate.

Interest-only fixed terms and how they affect your cash flow

Most investment loans in Melbourne are structured as interest-only for the first five years because it maximises the interest deduction and keeps repayments lower, which improves cash flow and borrowing capacity. You can fix the rate during the interest-only period, but not all lenders offer the same range of fixed terms on interest-only loans.

Some lenders will fix an interest-only loan for up to five years. Others cap it at three years or require you to switch to principal and interest repayments if you want a longer fix. If your loan is interest-only and you fix for five years, but the interest-only period expires after three years, the loan will automatically convert to principal and interest. That conversion does not trigger a break cost, but your repayments will increase significantly.

If you are planning to hold the property long term and want the repayment certainty of a fixed rate, make sure the fixed term does not extend beyond your interest-only period unless you are prepared for the repayment increase.

Two-year versus five-year fixed terms for Melbourne investors

Two-year fixed terms give you short-term certainty and lower break cost risk. They suit investors who may sell, refinance, or expand their portfolio within a few years. Five-year terms lock in your rate for longer, which can be valuable if you expect rates to climb, but they come with higher break cost risk and less flexibility.

At current variable rates, a two-year fix usually sits slightly below the variable rate, and a five-year fix usually sits slightly above it. Lenders price fixed rates based on the wholesale swap rate for that term, plus their margin. The longer the term, the higher the rate, because the lender is taking on more interest rate risk.

If you are borrowing to buy an investment property in Melbourne and you plan to reassess your portfolio or refinance in the next few years, a two or three-year fix or a split structure will usually serve you better than a five-year lock. If you are holding for the long term and rates are low, a five-year fix can make sense, but only if you are confident you will not need to access equity or sell before the term ends.

When to refix and how to time it without guessing the market

You do not need to wait until your fixed term expires to start planning your next move. Most lenders let you lock in a new fixed rate up to 90 days before your current term ends. If you are coming off a fixed rate in three months and you want to refix, you can lock the new rate now and avoid the risk of rates increasing in the meantime.

If your fixed term is expiring and you are not sure whether to refix or move to variable, look at what has changed in your situation rather than trying to predict the next rate move. If your income has increased or your portfolio has grown, you may have more borrowing capacity now than when you first fixed. That might be the right time to refinance with a different lender for a better rate or access equity, rather than refixing with your current lender out of convenience.

Investors who refix automatically without comparing offers often pay more than they need to. Lenders compete for refinance business, and the rate you are offered as an existing customer is often higher than the rate available to a new customer with another lender.

Simple hacks to reduce your fixed rate or avoid break costs

One option is to negotiate a rate reduction with your current lender before you lock in a fixed term. Lenders have discretion to discount fixed rates, particularly if you have a low loan-to-value ratio, a strong repayment history, or multiple properties with the same lender. Call your lender or speak to a broker and ask what discount is available. The difference between the advertised rate and the discounted rate can be 0.20 to 0.40 per cent, which adds up over a two or three-year term.

Another option is to structure your loan with a small variable portion, even if you want most of it fixed. Keeping $50,000 or $100,000 on variable gives you a buffer for extra repayments, redraw access, or small top-ups without touching the fixed portion. If you need to increase your loan slightly for renovations or to cover a shortfall, you can do that on the variable portion without breaking the fixed rate.

If you are refinancing and your current loan has a fixed rate with time remaining, ask the new lender if they will cover your break costs as part of a refinance offer. Some lenders offer cashback or will absorb break costs up to a certain amount to win your business. This is more common when you are borrowing a larger amount or consolidating multiple loans.

Call one of our team or book an appointment at a time that works for you

Fixed rate terms are not a set-and-forget decision. The term you choose should match your investment timeline, your cash flow needs, and your plans for the property. If you are not sure whether to fix, split, or stay variable, or if you are coming off a fixed term soon and want to compare your options, call one of our team or book an appointment at a time that works for you. We will look at your current loan, your portfolio goals, and the rates available across lenders in Melbourne, and help you lock in a structure that keeps your options open.

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