The Pros and Cons of Fixed Rates and Extra Repayments

If you own or plan to buy an investment property in Parramatta, the choice between a fixed rate and extra repayments deserves a proper chat. A fixed rate gives you certainty, but it can limit how quickly you pay the loan down.

We sit down with Parramatta investors all the time who want both: steady repayments and a faster way to cut the balance. Sometimes you can have both. Sometimes you need to choose, and that is perfectly fine.

What Are the Pros and Cons of a Fixed Rate Investment Loan?

A fixed rate locks in your interest rate for an agreed period, so your repayments will not change during that time. The trade-off is that you give up the chance to benefit if rates fall, and leaving the loan early may cost you.

The upside is easy to feel. When your rental income is steady and your repayments are steady, budgeting for the property is calmer. You know what the loan costs each month before the tenant's rent even arrives.

The downsides are worth knowing upfront:

• If the variable rate drops, your fixed rate will not follow it down.
• If you sell or refinance before the fixed term ends, the lender may charge a break cost. Each lender sets its own method for working this out, so ask for it in writing before you sign.
• Lenders set their own rules on extra repayments, offset accounts and redraw for fixed loans, so the features can differ a lot from one product to the next.

If you are comparing options, our investment loans page explains the range of products we can look at with you.

Can You Make Extra Repayments on a Fixed Rate Loan?

Often you can, but many lenders limit how much extra you can pay on a fixed loan during the fixed term. Whether a limit applies, and how large it is, depends on the lender and the product.

Before you commit, ask three direct questions. Is there a yearly limit on extra repayments? Is there a charge if I go over it? Can I access the extra money later if I need it? A clear answer to each one will save you a surprise down the track.

Extra Repayments Example: A $600,000 Investment Loan

Paying extra on a principal and interest loan lowers your balance sooner, which means less interest is charged on it going forward. The effect in the first year is modest, but it builds as the balance falls.

As an illustrative example, consider a Parramatta investor with a $600,000 loan over 30 years at 6.75% p.a., paying principal and interest. The monthly repayment works out to about $3,892. This rate is for illustration only and is not a current offer.

The investor decides to add $500 a month, which is $6,000 over the year. After 12 months, their balance is about $587,400. Without the extra payments, it would be about $593,600. That is a difference of roughly $6,200, made up of the $6,000 they paid plus a small amount of interest they no longer owe.

The lesson here is about patience. The first year looks small, and the benefit grows when you keep going. The cost is cash flow. That $500 is no longer available for repairs, vacancy periods or a holiday, so it only makes sense if you keep a cash buffer elsewhere.

Should You Pay Extra Into the Investment Loan or Your Home Loan?

If you also have a home loan, interest on that loan is not tax deductible, while interest on a loan used for a rental property generally is. Many investors therefore think about directing spare cash to the home loan first. Please check this with your accountant before you decide.

The reasoning is that paying down non-deductible debt reduces a cost you cannot claim, whereas paying down the investment loan also reduces interest you could have claimed. Extra repayments on the investment loan are still a sound way to build equity, but the tax picture is different. Your accountant can look at your full situation, and we can set the loans up to match their advice. Our home loans team can look at both sides of the picture with you.

Why Redraw and Offset Need Care on an Investment Loan

Money you pay ahead can often be taken back out, but how you use it later affects your tax. The ATO treats each redraw as a separate borrowing, and its deductibility depends on what the money is used for.

If you redraw from an investment loan to pay for a family holiday, the interest on that portion is private, not deductible. It can also muddy your records for the whole loan. An offset account works differently, because it reduces the interest charged without reducing the loan balance. The lower interest means a smaller amount to claim, so it is not a free lunch for deductions. Ask your accountant how withdrawals from an offset account are treated in your case.

A tidy approach is to keep spare cash in an offset account and keep your investment loan purpose clean.

Splitting Your Loan Between Fixed and Variable

A split loan puts part of the debt on a fixed rate and part on a variable rate. It gives you some certainty and some room to move, but you carry the complexity of managing two accounts.

The usual idea is simple to describe: the fixed portion covers the part of the loan you want to keep steady, and extra repayments go to the variable portion, where lenders often allow more flexibility. Whether that fits depends on how the lender handles each portion, so we check this before recommending it. If you already have a fixed loan and want to explore a change, our refinancing page outlines how that works.

Another point to keep in mind is the lender's serviceability check. For banks, a new loan is assessed at a rate at least 3.0 percentage points above the loan rate, so a higher borrowing amount may not be approved even if today's repayment looks affordable. Rental income is also counted at no more than 80 per cent of the expected rent under APRA guidance.

Every investor's goals are different. Some want steady cash flow, others want to cut debt quickly, and many want a mix of both. A conversation helps you find where you sit.

If you would like to talk it through with someone local, visit our Parramatta mortgage broker page. Call one of our team or book an appointment at a time that works for you, and we will walk through your options at your pace.

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