Fixed rate terms on an investment loan typically range from one to five years, and the term you choose affects both your current repayments and your ability to respond to market changes.
Double Bay investors are often weighing fixed terms while managing properties in one of the city's more expensive suburbs. The question is not whether to fix, but for how long, and whether locking in a rate for three years rather than one serves the strategy behind the purchase.
The Practical Difference Between a One-Year and Three-Year Fixed Term
A one-year fixed rate gives you certainty for twelve months, then reverts to the lender's standard variable rate unless you refinance or negotiate a new fixed term. A three-year term locks the rate for thirty-six months, which protects you from rate rises but also means you cannot access rate cuts without paying break costs.
Consider an investor who acquires a one-bedroom apartment near Edgecliff Station and fixes the rate for twelve months. When the term expires, they can switch to variable, negotiate a new fixed rate, or refinance to another lender without penalty. If they had fixed for three years and rates dropped in year two, they would need to calculate whether the savings from a lower rate justify the break cost.
The most common fixed terms for investment loans are one, two, three and five years. Lenders price these terms differently based on their own funding costs and expectations for the cash rate. A one-year fixed rate is often closer to the current variable rate, while longer terms typically carry a premium.
How Fixed Terms Interact With Interest-Only Periods
Many investors structure their loan with an interest-only period to reduce holding costs while the property generates rental income. The fixed rate term and the interest-only period are separate decisions, though they often overlap.
If you fix for two years and have a five-year interest-only period, you will pay interest only at a fixed rate for the first two years, then revert to interest only at a variable rate for the remaining three years. If you fix for the full five years and choose interest only for the same period, the rate is locked for the entire interest-only term. When the interest-only period ends, the loan converts to principal and interest unless you apply to extend it, and that conversion happens regardless of whether the rate is still fixed or has reverted to variable.
In a scenario where an investor acquires a property in Double Bay with a two-year fixed rate and a five-year interest-only term, the monthly repayment is calculated on the fixed rate for the first two years. At the end of year two, the rate reverts to variable, the repayment adjusts accordingly, but the loan remains interest only for another three years. At the end of year five, the loan switches to principal and interest, and the repayment rises again to include principal reduction.
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What Happens When You Break a Fixed Rate Early
If you repay, refinance or sell the property during the fixed term, the lender will typically charge a break cost. The cost is calculated based on the difference between the fixed rate you are paying and the rate the lender can earn by reinvesting the funds for the remaining term.
Break costs are highest when you exit a fixed rate and the lender's current rates are lower than the rate you locked in. If rates have risen since you fixed, the break cost may be zero or even result in a break fee rebate, though that is less common.
Lenders calculate break costs using their wholesale funding rates, not the advertised fixed rates you see on comparison sites. The formula is not standardised across lenders, which means the break cost on a three-year fixed term with one year remaining can vary significantly depending on the institution.
If you are considering selling or refinancing before the fixed term expires, request a break cost estimate from your lender. The estimate is usually valid for a short period, typically seven to fourteen days, and the actual cost will depend on the settlement date.
The Split Strategy for Double Bay Investors
A split loan divides the borrowing between fixed and variable portions, which gives you partial protection from rate rises while maintaining flexibility to make extra repayments or access redraw on the variable portion.
An investor acquiring a property in the Double Bay area might split the loan 50-50, fixing half for three years and leaving the other half variable. If rates rise, the fixed portion insulates half the debt. If rates fall, the variable portion benefits immediately, and the investor can make lump sum repayments against the variable portion without penalty.
The split does not need to be equal. You can fix 70 per cent and leave 30 per cent variable, or any other ratio that suits your risk tolerance and cash flow. Each portion of the loan is treated separately for rate, repayment type and features, so you might choose interest only on the fixed portion and principal and interest on the variable portion.
Some lenders allow multiple splits, so you could fix part of the loan for one year, another part for three years, and leave the remainder variable. That structure spreads your fixed rate expiry dates, which means you are not forced to refinance or renegotiate the entire loan at once if market conditions are unfavourable.
How Fixed Rate Terms Affect Borrowing Capacity
Lenders assess your borrowing capacity using the higher of the actual rate or the serviceability buffer, which is currently three percentage points above the product rate. A fixed rate does not reduce the buffer, so the assessment rate is the fixed rate plus three per cent, or the variable rate plus three per cent, whichever is higher at the time of application.
If you are borrowing to acquire an investment property and the lender offers a three-year fixed rate at 5.8 per cent, the serviceability assessment will use 8.8 per cent. Rental income is included in the assessment, typically at 80 per cent of the expected rent to account for vacancies and management costs.
The term you choose does not change the serviceability calculation, but it does affect the actual repayment you will make. A longer fixed term gives you certainty over future repayments, which can be useful if you are managing multiple properties or planning further acquisitions and want to lock in your holding costs.
Fixed Rate Terms and Negative Gearing Under the New Rules
The changes to negative gearing that take effect from 1 July 2027 do not alter how interest is calculated or how fixed terms work, but they do change how rental losses are treated for tax purposes if you acquire a property after 7.30pm on 12 May 2026.
For properties acquired after that date, other than eligible new builds, net rental losses can only be offset against other residential rental income or carried forward to offset future residential rental income or capital gains. They cannot be offset against salary or wages.
If you fix the rate for three years and the property runs at a loss, the interest is still deductible, but the loss is quarantined unless you have other residential rental income to offset it against. The fixed term itself does not change the tax treatment, but it does give you certainty over the interest expense, which is the largest component of most rental property deductions.
For properties held before the 12 May 2026 announcement, or eligible new builds acquired after that date, the existing negative gearing rules continue to apply, and rental losses can be offset against other income without restriction.
Choosing the Right Fixed Term for a Double Bay Investment
The fixed term that suits your circumstances depends on your outlook for interest rates, your need for certainty, and how long you intend to hold the property. If you expect to sell or refinance within two years, a one-year fixed term or a variable rate gives you more flexibility. If you are holding for the medium term and want to lock in repayments, a three or five year term provides stability.
Double Bay properties often attract investors who are building a portfolio across the eastern suburbs or holding assets for long-term capital growth. If you are acquiring a property with the intention of holding it for ten years or more, fixing for five years covers half that period, but it also means you are locked in if rates fall or if you need to access equity for another purchase.
Most lenders allow you to refinance or renegotiate the fixed term at expiry without penalty, so fixing for one or two years and reassessing at the end of the term is a common approach. It gives you the option to fix again, switch to variable, or move to another lender based on market conditions at the time.
How to Compare Fixed Rate Investment Loan Products
When comparing fixed rate investment loan options from different lenders, look beyond the advertised rate. Check whether the rate applies to interest only or principal and interest, what the comparison rate includes, and what features are available during the fixed term.
Some lenders allow small extra repayments during the fixed period, typically up to $10,000 or $20,000 per year, without penalty. Others do not permit any additional repayments or offer offset accounts on fixed rate loans. If you plan to make lump sum payments or want the flexibility of an offset, a variable rate or a split loan may be more suitable.
The rate you are offered will depend on the loan to value ratio, the property type, and the amount you are borrowing. A lower LVR usually attracts a lower rate, and some lenders offer discounts for new customers or for borrowers who bundle other products such as transaction accounts or insurance.
If you need to borrow above 80 per cent of the property value, Lenders Mortgage Insurance will apply, and the premium is usually added to the loan balance. LMI does not affect the fixed rate itself, but it does increase the total borrowing and therefore the repayment.
What to Do When Your Fixed Rate Term Expires
When the fixed term ends, the loan automatically reverts to the lender's standard variable rate unless you take action. The standard variable rate is typically higher than the discounted variable rate offered to new customers, so it is worth contacting your lender or a broker at least 60 days before the expiry date.
You can negotiate a new fixed term with your current lender, switch to a discounted variable rate, or refinance to another lender. If you refinance, you will need to go through a full application process, including a valuation of the property and an assessment of your current income and liabilities.
If the property has increased in value and you have paid down some of the loan, your LVR may have improved, which can give you access to lower rates or allow you to release equity for another purchase.
Some lenders will contact you before the fixed term expires with an offer to refix at a new rate. Compare that offer against the rates available in the market and against the lender's current variable rate. If the gap is small and you value stability, fixing again may be appropriate. If variable rates are lower or you expect rates to fall, switching to variable or fixing for a shorter term gives you more flexibility.
The Financial District works with Double Bay investors to review fixed rate expiry dates, compare refinancing options, and structure loans that align with medium and long-term property strategies. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
What is the most common fixed rate term for an investment loan?
The most common fixed rate terms are one, two, three and five years. Investors typically choose one or two year terms if they want short-term certainty with the option to reassess, or three to five years if they want longer protection from rate rises.
Can I make extra repayments on a fixed rate investment loan?
Some lenders allow small extra repayments during the fixed period, typically up to $10,000 or $20,000 per year, without penalty. Others do not permit any additional repayments on fixed rate loans, so it depends on the lender and product.
What happens when my fixed rate term expires?
The loan automatically reverts to the lender's standard variable rate unless you negotiate a new fixed term, switch to a discounted variable rate, or refinance to another lender. It is worth reviewing your options at least 60 days before the expiry date.
How is a break cost calculated on a fixed rate investment loan?
Break costs are calculated based on the difference between the fixed rate you are paying and the rate the lender can earn by reinvesting the funds for the remaining term. The cost is highest when current rates are lower than your fixed rate.
Does a fixed rate term affect how negative gearing is calculated?
The fixed rate term does not change the tax treatment of rental losses, but it does give you certainty over the interest expense, which is the largest deductible component. Under the new rules from 1 July 2027, rental losses on properties acquired after 12 May 2026 are quarantined unless the property is an eligible new build.
