Why Should Narellan Investors Weigh Fixed Rates Carefully?

A fixed rate gives you certainty, but it can limit how quickly you pay down your investment loan. If you plan to put spare cash into the loan, the extra repayment rules matter as much as the rate itself.

For many property investors in Narellan, the question is not just "fixed or variable?" It is "how much freedom do I want while the rate is locked in?" That depends on your cash flow, your plans for the property and how you feel when rates move.

Can You Make Extra Repayments on a Fixed Rate Investment Loan?

Often you can, but usually only up to a limit. Lenders set their own rules on extra repayments during a fixed term, so the cap, and any charge for going over it, should be checked in the loan terms before you sign.

The features attached to a fixed investment loan also differ from lender to lender. Some fixed loans allow an offset account or redraw, and some do not. A split loan, where one part is fixed and one part is variable, may behave differently again. These are product terms, not government rules, so it pays to ask for them in writing.

If you pay more than the cap allows, a lender may charge a fee or, in some cases, break costs. The method for working out break costs varies, so ask for the lender's explanation of how it is calculated.

How Do Extra Repayments Reduce Investment Loan Interest?

Every dollar you add to the loan stops attracting interest, so extra repayments reduce the interest charged from that point on. The saving is easy to estimate: multiply the extra amount by the interest rate.

As an illustration only, at an example rate of 6.75% p.a., a $10,000 lump sum cuts interest by roughly $675 over a year. On a $500,000 loan at that same example rate, the first year's interest is about $33,750 before any extra repayments. You can test your own numbers in our loan repayment calculator.

The trade-off is access. Money paid into a loan is not always easy to take back out. With redraw you may be able to retrieve it, but with a plain extra repayment on a fixed loan you may not.

Extra Repayments and Tax Deductions on an Investment Property

Extra repayments lower your interest bill, which also lowers the interest you can claim. Interest on money borrowed to hold a rental property is generally deductible, but only the interest part of a repayment is, not the principal.

That means paying down the loan is not a loss. You pay less interest overall, and a smaller deduction is the natural result of a smaller cost. Redraws need extra care. Under ATO ruling TR 2000/2, a redraw is treated as a new borrowing, and the deduction depends on what you use the money for. If you redraw for a private purpose, that interest is not deductible.

These are general comments only. Please speak with your accountant about your own tax position before making decisions.

Fixed, Variable or Split: Which Suits an Investor Who Wants to Pay Down Debt?

A split loan suits an investor who wants some certainty and some flexibility. You fix a portion for stability and keep a variable portion, where extra repayments are often more open, for your spare cash.

Consider an investor with a $500,000 loan and $25,000 in savings. The investor is weighing a fully fixed loan at the 6.75% example rate, but the lender caps extra repayments at $10,000 a year. Putting in the full $25,000 would exceed the cap and could bring charges.

The broker suggests a different structure: $300,000 fixed and $200,000 variable, with the savings directed to the variable portion. For this illustration, the variable portion is also assumed at 6.75%, so the comparison is like for like. The $25,000 reduces interest by about $1,687 a year at that rate. The cost is that the variable portion moves with the market, so repayments on that part can rise or fall. The investor accepts this because the fixed portion still covers most of the debt.

The outcome is a loan that has more room for extra repayments than the fully fixed option would have allowed. Whether a lender offers that split, and with what features, varies, so it is worth comparing options across lenders.

What Happens to Your Serviceability When You Fix?

Fixing does not change the method lenders use to test you. Banks and other APRA-regulated lenders must assess new borrowers at an interest rate at least 3.0 percentage points above the loan's rate, whether the rate is fixed or variable. Non-bank lenders are not bound by the APRA buffer.

This matters if you are buying another property or restructuring. Your borrowing capacity can still differ, because it depends on the actual rate on the loan. A lower fixed rate could help it and a higher one could reduce it. Ask a broker to run both scenarios. If you choose interest-only to ease cash flow, lenders are expected to assess repayments over the shorter remaining term once principal and interest begins, so an interest-only period does not increase how much you can borrow.

Rental income is also treated cautiously. APRA expects lenders to count no more than 80% of expected rent, to allow for periods without a tenant. Lenders then apply their own policies on top.

When Does Refinancing Make Sense Near the End of a Fixed Term?

Refinancing makes sense when your current loan no longer suits your goals, and the cost of moving is lower than the benefit. The end of a fixed term is a natural time to review, because you can usually move without break costs.

Before the fixed period ends, ask your lender what rate it will revert to and what features you will keep. Then compare it with what other lenders are offering. Our refinancing page explains how that review works, and our refinance feasibility tool can help you see whether a move is worth considering. Switching has its own costs, such as discharge and valuation fees, which vary by lender and should be weighed against any saving.

If you are reviewing a loan for a property in the area, our Narellan mortgage broker team can walk you through the options in person. Call one of our team or book an appointment at a time that works for you, and we will look at your loan structure together, with no pressure and plenty of time for your questions.

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