How to Handle Fixed Rate Investment Loans & Extra Repayments

Fixed rate investment loans typically do not allow extra repayments without incurring break costs, which can eliminate any potential savings from paying ahead.

This constraint affects Chadstone investors differently depending on whether the property is held for long-term capital growth near Chadstone Park and Holmesglen TAFE, or positioned for shorter holding periods in the apartment precincts around Chadstone Shopping Centre. A fixed rate offers certainty during volatile rate cycles, but the structure requires understanding exactly what flexibility you retain and what you forfeit.

Why Fixed Rate Investment Loans Restrict Extra Repayments

Lenders price fixed rates based on wholesale funding costs locked in for the agreed term. When you make an extra repayment, the lender loses the interest they expected to earn over that period and may still be locked into their own borrowing arrangements. Break costs compensate for this loss and are calculated using the difference between your fixed rate and the current wholesale rate, multiplied by the remaining loan term and the amount repaid early. If rates have dropped since you fixed, break costs can reach several thousand dollars even on modest extra payments.

Most lenders allow a capped annual extra repayment amount on fixed rate loans, typically between $10,000 and $30,000 per year, without penalty. Exceeding that cap triggers break cost calculations. Some investment loan products offer no extra repayment capacity at all during the fixed period.

The Offset Alternative for Investment Properties

An offset account linked to your investment loan achieves a similar outcome to extra repayments without the penalties. The balance in the offset account reduces the loan balance on which interest is calculated, lowering your interest charges without technically making an extra repayment. Any funds placed in offset remain accessible, which matters when managing vacancy periods or unexpected repairs on a Chadstone rental property.

Not all fixed rate investment loans include an offset facility. Variable rate investment loans almost always do, but fixed rate products often charge a higher interest rate to include offset functionality or exclude it entirely. The rate premium for offset on a fixed loan is typically between 0.10% and 0.30% per annum. On a loan amount of $500,000, that premium costs $500 to $1,500 annually, which may be justified if you expect to hold surplus cash during the fixed period.

Split Rate Structures That Preserve Flexibility

A split loan divides your total borrowing between fixed and variable portions. You might fix 60% of the loan to protect against rate increases while keeping 40% variable with full offset and redraw functionality. Extra repayments and surplus rental income are directed to the variable portion, reducing your overall interest cost without triggering break costs on the fixed component.

Consider an investor borrowing to purchase a two-bedroom unit in one of the newer developments near Warrigal Road. They structure the loan as $400,000 fixed for three years at a locked rate, and $200,000 variable with offset. Rental income averaging $2,400 per month exceeds the interest-only repayments, and the surplus $600 per month is deposited into the offset account linked to the variable portion. Over three years, that investor reduces the effective balance on the variable portion by $21,600 without incurring any break costs, while still holding rate certainty on the majority of the borrowing.

When Fixed Rates Without Offset Still Make Sense

If your investment strategy involves negative gearing with minimal surplus cash flow, an offset account provides limited value because there are no excess funds to deposit. In that scenario, accepting a lower fixed rate without offset may deliver better outcomes than paying a rate premium for a feature you will not use. This applies particularly to investors purchasing established properties in Chadstone who are managing higher land tax and body corporate costs, leaving little room for surplus repayments.

The decision also depends on your broader financial position. If you hold surplus savings in other accounts earning minimal interest, placing those funds in an offset account linked to your investment loan delivers a return equivalent to your loan interest rate, which exceeds most savings account rates. If those surplus funds are already allocated to other investments or offset against your owner-occupied home loan, the investment loan offset becomes redundant.

How the 2027 CGT and Negative Gearing Changes Affect Fixed Rate Decisions

From 1 July 2027, capital gains tax arrangements and negative gearing deductions will change for established residential properties purchased after 12 May 2026. The 50% CGT discount will be replaced with an inflation-indexed calculation and a minimum 30% tax on gains. Negative gearing losses on those properties will only be deductible against residential property income, not other income sources, though losses can be carried forward.

If you purchased an established investment property in Chadstone before Budget night in May 2026, your existing CGT and negative gearing treatment is grandfathered. If you are acquiring property now, these changes may influence whether you fix your rate and for how long. A longer fixed period extending beyond mid-2027 locks in your borrowing cost during a period when tax settings are shifting, which may affect your net holding cost once deductions are restricted. Investors purchasing new builds retain the option to choose the previous 50% CGT discount, which may alter the relative appeal of fixing rates on new versus established stock.

Refinancing a Fixed Investment Loan Before the Term Ends

Refinancing during a fixed period attracts the same break cost calculation as making a lump sum repayment. The break cost is payable in full at settlement and can be substantial if rates have fallen since you fixed. Some lenders allow you to port your fixed rate to a new property if you are selling and purchasing simultaneously, avoiding break costs, but this requires precise timing and both properties must be financed with the same lender.

If your fixed term has less than 12 months remaining, it may be worth waiting until the fixed period expires before refinancing. Break costs are highest when the remaining term is longest. In the final months of a fixed period, break costs diminish rapidly as the lender's exposure to rate movement narrows. Timing your refinance for the end of the fixed term gives you access to current rates and product features without penalty.

Interest-Only Versus Principal and Interest on Fixed Investment Loans

Most investors favour interest-only repayments during the fixed period to maximise tax deductions and preserve cash flow. Interest-only terms on investment loans are typically available for up to five years, after which the loan reverts to principal and interest unless you request an extension or refinance. Fixing your rate on an interest-only basis means your repayment amount remains constant for the fixed term, assuming no rate changes on any variable portion.

If you fix on a principal and interest basis, your repayment includes both interest and a portion of the loan principal. This reduces your loan balance over time, but it also reduces your tax-deductible interest and increases your minimum required repayment. For negatively geared properties, principal and interest repayments during the fixed period may increase your out-of-pocket holding cost without delivering a proportional tax benefit. The principal component is not tax-deductible, so you are effectively using after-tax income to reduce a loan that was funding a tax-deductible investment.

Choosing the Right Fixed Term Length

Fixed terms typically range from one to five years, with three years being the most common choice among property investors. Shorter fixed terms offer less rate certainty but lower break costs if your circumstances change. Longer fixed terms protect against sustained rate increases but lock you into the structure for an extended period.

Your choice should align with your expected holding period and broader portfolio plans. If you are acquiring a property in Chadstone as a medium-term hold with a view to selling within five years, a two or three-year fixed term reduces the risk of paying break costs when you exit. If you are building a long-term portfolio and intend to hold the property for a decade or more, a longer fixed term may provide stability during the early years when cash flow is typically tightest.

Call one of our team or book an appointment at a time that works for you to discuss which fixed rate structure aligns with your investment strategy and cash flow position.

Frequently Asked Questions