Fixed, Variable, and Split Investment Loans Explained

When buying an investment property, one of the most significant decisions you'll face is selecting the right investment loan structure. The choice between fixed rate, variable rate, or split loan options can substantially impact your investment property finance outcomes, cash flow, and ability to build wealth through property. For property investors in Kew and across Melbourne, understanding these investment loan options is essential for making informed decisions that align with your property investment strategy.

Understanding Variable Rate Investment Loans

A variable interest rate investment loan means your interest rate can fluctuate based on market conditions and decisions made by the Reserve Bank of Australia. When the official cash rate changes, lenders typically adjust their variable rates accordingly, which directly affects your loan repayments.

Key Investment Loan Features of Variable Rates:

• Flexibility to make additional repayments without penalties
• Access to offset accounts and redraw facilities
• Potential to benefit from interest rate decreases
• Ability to refinance or restructure more readily
• Often come with interest rate discounts for larger loan amounts

Variable investment loan products typically offer more flexibility than fixed options, making them popular among property investors who want to accelerate their loan repayments or leverage equity for portfolio growth. The investment loan benefits include the ability to access funds you've paid ahead, which can be particularly valuable if you need rental income to supplement unexpected expenses like body corporate fees or vacancy periods.

For investors focused on maximising tax deductions and building long-term wealth, variable rates paired with interest only investment structures can provide cash flow advantages. This approach allows you to claim the full interest as one of your claimable expenses while directing additional funds toward acquiring more properties.

Fixed Interest Rate Investment Loans

A fixed interest rate investment loan locks in your investor interest rates for a predetermined period, typically between one and five years. During this time, your repayments remain constant regardless of market movements.

Investment Loan Benefits of Fixed Rates:

• Certainty in calculating investment loan repayments for budgeting purposes
• Protection from interest rate increases
• Predictable cash flow for managing rental property loan obligations
• Peace of mind knowing your costs remain stable
• Ability to plan your property investment strategy with confidence

Fixed rate investment loans suit investors who prioritise certainty and want to protect themselves from rising investor interest rates. This can be particularly valuable if you're managing multiple properties and need consistent cash flow to cover claimable expenses, stamp duty on new acquisitions, or Lenders Mortgage Insurance (LMI) costs.

However, fixed rates come with limitations. You'll typically face restrictions on additional repayments, limited access to offset accounts, and potentially significant break costs if you need to refinance or access an equity release before the fixed term ends. It's also important to consider what happens when your fixed term expires - you'll need to either refinance to a new rate or revert to your lender's standard variable rate.

Split Loan Options for Investment Properties

A split loan structure combines both fixed and variable components within the same investment loan amount, offering a middle ground that many property investors find appealing. You might choose to fix 50% of your loan amount while keeping the other 50% variable, or select any split ratio that suits your circumstances.

Why Property Investors Choose Split Loans:

1. Risk Management: Partial protection from rate increases while maintaining some flexibility
2. Flexibility: Access to offset accounts and additional repayments on the variable portion
3. Strategic Planning: Different loan structures for principal and interest versus interest only components
4. Portfolio Growth: Ability to leverage equity from the variable portion while maintaining stable repayments on the fixed portion
5. Tax Optimisation: Structure different portions to maximise tax deductions and manage cash flow effectively

Split loan structures work particularly well for investors with multiple properties or those planning to expand their portfolio. The variable portion allows you to make extra repayments when rental income is strong or you have surplus funds, while the fixed portion provides stability for your core investment property rates.

Choosing the Right Structure for Your Investment Strategy

Your ideal investment loan structure depends on several factors specific to your circumstances:

Consider Variable Rates If:

• You want maximum flexibility for additional repayments
• You plan to use equity release or leverage equity for future investments
• You anticipate needing to refinance or adjust your investment loan refinance strategy
• You want to utilise offset accounts to reduce interest while maintaining liquidity
• You're comfortable with fluctuating repayments

Consider Fixed Rates If:

• You prioritise certainty in calculating investment loan repayments
• You're concerned about rising investor interest rates
• You need consistent cash flow to manage multiple properties
• You don't plan to make significant additional repayments
• You want protection during periods of market volatility

Consider Split Loans If:

• You want to balance flexibility and stability
• You're building a diverse property portfolio
• You want some protection from rate increases without sacrificing all flexibility
• You're managing both interest only investment and principal and interest components
• You want to hedge your position in uncertain market conditions

Interest Only vs Principal and Interest for Investment Properties

Regardless of whether you choose fixed, variable, or split structures, you'll also need to decide between interest only and principal and interest repayments. Many property investors opt for interest only investment loan structures to maximise cash flow and tax benefits.

With interest only repayments, you're only paying the interest charged on your investment loan amount, which means:

• Lower minimum repayments compared to principal and interest
• Maximum claimable expenses for tax purposes
• More cash available for additional property acquisitions
• Better alignment with negative gearing benefits
• Improved ability to manage vacancy rate periods

However, interest only periods are typically limited to five years, after which your loan reverts to principal and interest unless you negotiate an extension through your investment loan refinance. It's crucial to plan for this transition when calculating investment loan repayments over the long term.

Understanding Investment Loan Features and Costs

When comparing investment loan products across Australia, consider these important features:

Loan to Value Ratio (LVR): Your LVR affects your investor deposit requirements and whether you'll need to pay Lenders Mortgage Insurance (LMI). Generally, an LVR above 80% triggers LMI costs, though some lenders offer low LMI loans with favourable terms.

Rate Discounts: Many lenders offer interest rate discounts based on your loan amount, LVR, and relationship with the institution. These rate discount opportunities can significantly reduce your investment property rates over time.

Fees and Charges: Application fees, annual fees, and discharge fees vary significantly between lenders. Factor these into your investment loan application considerations.

Flexibility Features: Offset accounts, redraw facilities, and the ability to split your loan later can add substantial value to your investment property finance arrangement.

Accessing Investment Loan Options from Multiple Lenders

At AXTON Finance, we help property investors access investment loan options from banks and lenders across Australia, not just major banks. This means we can compare hundreds of investment loan products to find the most suitable investment loan features for your situation.

Whether you're buying your first investment property or expanding your property portfolio, working with experienced mortgage brokers ensures you benefit from:

• Comprehensive comparison of investor interest rates across multiple lenders
• Expertise in structuring loans for optimal tax benefits and cash flow
• Understanding of how different lenders assess rental income and calculate serviceability
• Knowledge of which lenders offer the most favourable investment loan features
• Assistance with your investment loan refinance when market conditions change

Making Your Decision

The choice between fixed, variable, and split investment loan options isn't one-size-fits-all. Your decision should consider your risk tolerance, property investment strategy, plans for portfolio growth, and your ability to manage fluctuating repayments.

For many Kew property investors, a split loan structure offers the optimal balance - providing stability through the fixed component while maintaining flexibility for making additional repayments, accessing equity, and adapting to changing circumstances through the variable portion.

Regardless of which structure you choose, regularly reviewing your investment loan remains crucial. Market conditions change, better investment property rates become available, and your personal circumstances evolve. An investment loan refinance at the right time can save you thousands of dollars annually while improving your loan structure for building wealth and achieving financial freedom.

If you're considering buying an investment property or reviewing your current rental property loan structure, the team at AXTON Finance can help you understand the investment loan benefits of each option and structure a solution tailored to your goals. Call one of our team or book an appointment at a time that works for you to discuss your investment property finance needs.