Understanding Fixed Rate Investment Loans and Strategy

Fixed rate investment loans lock your interest cost for a set period, typically between one and five years, which means your repayments stay the same regardless of what the Reserve Bank does.

That certainty appeals to Hornsby investors who want to forecast cash flow across multiple properties or protect rental income during periods when vacancy rates climb. The Pacific Highway commercial precinct and surrounding residential pockets near the hospital and Westfield attract stable tenant demand, but any period without rent still needs to be funded. Knowing your loan repayments in advance makes that easier to manage.

The trade-off comes in three forms: fixed rates are typically priced higher than variable rates at the time you lock in, you lose most offset account functionality during the fixed period, and if you break the loan early, you may face substantial break costs calculated on the lender's wholesale funding loss.

Under current APRA rules, every new investment loan must be assessed at a rate at least 3.0 percentage points above the actual product rate. That serviceability buffer applies whether you choose fixed, variable, or split. For investors adding to a portfolio, the buffer affects how much you can borrow, particularly if rental income alone does not cover the higher test rate.

Why Hornsby Investors Consider Fixed Rates

Investors fix rates to protect cash flow when they expect interest costs to rise or when rental income sits close to loan repayments, leaving little room for rate increases.

Consider an investor who owns a two-bedroom unit near Hornsby station and plans to purchase a second property within 12 months. The investor fixes the rate on the existing loan for three years to ensure serviceability on the next application remains stable. If variable rates climb before the second purchase, the fixed loan repayments stay unchanged, which preserves borrowing capacity and avoids a situation where rising repayments reduce the amount a lender will approve on the new loan.

Fixed rates also suit investors who prefer to model portfolio performance over a known horizon. When you lock in a rate, you know exactly what each property will cost to hold, which makes it easier to decide whether to retain the property, sell, or add another one.

How the 2026 Negative Gearing Changes Affect Fixed Rate Decisions

From the 2027-28 income year, losses on established residential investment properties acquired after 12 May 2026 can only be offset against income from other residential properties, not against salary or wages.

Properties held at 12 May 2026, including those under contract awaiting settlement at that time, continue to enjoy full negative gearing against all income until sold. New builds acquired after that date also retain full negative gearing.

If you purchased an established property in Hornsby before the cut-off and you lock in a fixed rate now, your interest remains fully deductible against all income for as long as you hold the property. That makes the fixed rate a direct cost you can forecast and claim in full. If you acquired an established property after 12 May 2026 and rental income does not cover the fixed repayments, those losses can only reduce tax on other residential property income or be carried forward.

Investors who bought before the change often prefer fixed rates because the tax benefit is certain and the cash flow is predictable. Investors who bought after the change may still fix rates, but they need to weigh the cost of holding the property without full negative gearing against the benefit of certainty.

Fixed Versus Variable: How the Tax Treatment Applies to Both

Interest on borrowings used to acquire or hold a rental property is deductible to the extent the property is rented or genuinely available for rent, regardless of whether the rate is fixed or variable.

The choice between fixed and variable does not change the tax deduction. What changes is the timing and certainty of the cost. A variable rate may fall, which reduces both your repayment and your deduction. A fixed rate stays the same, so your deduction stays the same, but you cannot benefit from rate cuts during the fixed period.

For Hornsby investors holding properties acquired before 12 May 2026, a fixed rate locks in a known deduction each year. For those who bought after that date, the fixed rate still delivers certainty, but the deduction can only offset residential property income unless the property qualifies as a new build.

Interest-Only Repayments and Fixed Rates

Most lenders allow you to fix an investment loan on an interest-only basis for up to five years, though the rate may differ slightly from a principal-and-interest fixed rate on the same term.

Interest-only repayments reduce your monthly outgoings, which improves cash flow and may allow you to service a larger loan or hold more properties. The downside is that you do not reduce the loan balance during the interest-only period, so the principal remains unchanged when you revert to principal-and-interest repayments or refinance.

Under APRA Prudential Standard APS 112, a loan with an interest-only period longer than five years and an LVR above 80 per cent is classified as non-standard, which means the lender holds more capital against it. Most ADIs structure their interest-only investment loans to avoid that classification, so you will typically see a maximum interest-only period of five years on loans above 80 per cent LVR.

An investor holding a property near the Hornsby TAFE precinct might choose a three-year interest-only fixed rate to maximise cash flow while the property appreciates, then refinance to a variable rate or a new fixed term before the interest-only period ends. That approach works when the strategy is to hold for capital growth rather than pay down debt.

Split Rate Loans: Combining Fixed and Variable

A split rate loan divides your borrowing into two portions, one fixed and one variable, which lets you lock in certainty on part of the debt while retaining flexibility on the rest.

The variable portion typically retains full offset account functionality, so you can park surplus cash there and reduce the interest charged on that part of the loan. The fixed portion does not offset, so any cash sitting in an offset account only affects the variable portion.

In our experience, Hornsby investors with irregular income or bonus payments often split their loans 50/50 or 60/40 in favour of variable. The fixed portion provides a floor for repayments, while the variable portion allows them to make extra repayments or redraw without penalty.

The split also reduces exposure to break costs. If you need to sell or refinance before the fixed term ends, only the fixed portion incurs a break cost. The variable portion can be repaid at any time without penalty.

What Happens When Your Fixed Rate Expires

When a fixed rate term ends, your loan automatically reverts to the lender's standard variable rate unless you refinance or negotiate a new fixed term before expiry.

The standard variable rate is typically higher than the discounted variable rate offered to new customers, so if you do nothing, your repayments will usually increase. Most lenders send a notice 30 to 90 days before the fixed term expires, which gives you time to compare rates, negotiate with your current lender, or switch to a new lender.

If your circumstances have changed since you first fixed the rate, this is also the time to consider switching from interest-only to principal-and-interest, or vice versa, or adjusting your loan structure to suit your current portfolio strategy. For investors managing multiple properties in areas like Hornsby, aligning all fixed rate expiries to the same quarter can simplify refinancing decisions and give you more leverage when negotiating with lenders.

Debt-to-Income Limits and Fixed Rate Borrowing

From 1 February 2026, APRA limits each ADI to lending no more than 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater.

Your DTI is calculated by dividing all your debt, including investment loans, owner-occupied loans, personal loans and credit cards, by your gross annual income. The limit applies at the point of new lending, so if your DTI sits above six times, you may still be approved, but fewer lenders will have capacity to lend to you in any given quarter.

The limit applies regardless of whether you choose a fixed or variable rate. However, because fixed rates reduce your repayment volatility, some lenders may view a fixed rate portfolio more favourably when assessing serviceability for a borrower near the DTI threshold.

If you are a Hornsby investor with several properties and your DTI is approaching six times, fixing rates on existing loans can stabilise your repayments and make it easier to demonstrate serviceability when applying for additional lending.

Capital Gains Tax Changes from 1 July 2027

From 1 July 2027, the 50 per cent CGT discount for individuals on residential investment properties is replaced by cost base indexation and a 30 per cent minimum tax rate on real capital gains accruing from that date.

For properties owned before 1 July 2027 and sold after that date, gains are taxed under the old rules for the portion accruing before 1 July 2027 and under the new rules for gains accruing after that date. Investors can either obtain a market valuation as at 1 July 2027 or apply an ATO apportionment formula.

If you hold a Hornsby investment property on a fixed rate and you plan to sell during the fixed term, the CGT treatment depends on when the property was acquired and when the gain accrued, not on the loan structure. The fixed rate does not change the tax outcome, but it does lock in your holding costs, which may influence whether you sell before or after the fixed term expires.

For eligible new builds, both the existing 50 per cent CGT discount and the new indexation method are available as a choice at the time of disposal, which gives those properties a tax advantage over established stock.

When to Avoid Fixing an Investment Loan

Fixed rates may not suit investors who plan to sell within the fixed term, who expect to make large additional repayments, or who rely on offset accounts to manage cash flow across multiple loans.

Break costs apply when you repay a fixed rate loan before the term ends, and those costs can be substantial if wholesale funding rates have fallen since you locked in. The lender calculates break costs based on the difference between the rate you are paying and the rate they can now earn by redeploying that capital.

If you hold surplus cash and you prefer to offset it against your loan rather than hold it in a separate account, a variable rate will usually deliver a lower effective interest cost than a fixed rate, even if the variable rate starts slightly higher.

Investors with a high LVR and a deposit strategy that relies on making extra repayments to reduce LMI costs on a future purchase should avoid fixing the full loan amount, or consider a split that leaves enough variable debt to absorb those additional repayments.

Call one of our team or book an appointment at a time that works for you to discuss whether a fixed rate, variable rate, or split structure suits your Hornsby investment strategy and how the recent legislative changes affect your borrowing and tax position.

Frequently Asked Questions