Choosing between a variable or fixed rate on an investment property loan comes down to what you need from your cash flow right now and how comfortable you are with uncertainty over the next few years.
Most property investors benefit from keeping some portion of their loan on a variable rate because it gives them access to features like offset accounts and redraw, which can be useful when rental income fluctuates or you want to use equity for another purchase. Fixed rates can give you certainty on repayments, but they come with limitations that can be costly if your circumstances change.
Why Variable Rates Suit Most Investors
A variable rate investment loan lets you pay down extra principal, redraw funds, and link an offset account without restriction. If you have rental income sitting in an offset account linked to your investment loan, it reduces the interest you pay. That flexibility becomes important when vacancy periods occur or when you want to pull equity out to fund another deposit. Fixed rates lock you into a set repayment amount, but they usually prevent you from accessing those features, and exiting early can trigger break costs that run into thousands of dollars.
Consider an investor who bought a unit in West End, Brisbane, and kept the loan on a variable rate with a linked offset account. During a two-month vacancy between tenants, they used funds in the offset to cover the mortgage repayment without needing to dip into personal savings. Once the property was tenanted again, rental income went back into the offset, reducing the interest charged on the loan. That kind of movement is only possible on a variable rate structure.
When a Fixed Portion Makes Sense
A fixed rate can work well if you want to lock in a known repayment amount for part of your loan, particularly if you are borrowing at a higher loan to value ratio and want to avoid the risk of rate rises affecting your cash flow. Some lenders allow you to split your loan, fixing a portion while keeping the rest variable. This gives you some repayment certainty while still maintaining access to features like offset and redraw on the variable portion.
If you fix and rates drop, you are stuck paying the higher rate unless you are willing to pay break costs. If you fix and rates rise, you have protected that portion of your repayment. The decision depends on your view of the market and your tolerance for repayment increases. For most investors, a 50/50 split or keeping 70% variable and 30% fixed gives enough flexibility without locking in too much exposure.
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Interest Only vs Principal and Interest for Investment Loans
Interest only repayments are lower than principal and interest repayments, which can help with cash flow in the early years of ownership, particularly if the property is negatively geared. During the interest only period, you are not paying down the loan balance, but you can still make additional payments into an offset account or redraw facility if the loan structure allows it. That keeps your borrowing capacity intact while reducing the interest you pay.
Most lenders offer interest only periods of up to five years on investment loans, after which the loan reverts to principal and interest unless you apply to extend. If you plan to hold the property long term and build equity through capital growth rather than repayment, interest only can make sense. If you want to pay down debt and reduce your loan balance over time, principal and interest is the better option.
Changes announced in the 2026-27 Federal Budget mean that from 1 July 2027, losses from established residential investment properties purchased after 12 May 2026 can only be offset against rental income or capital gains from residential property, not against wage or salary income. For properties purchased before that date, existing negative gearing arrangements remain unchanged. If you are buying a new build, you can still claim losses against all income, and you also have the option to choose between the 50% capital gains tax discount or the new inflation-indexed discount when you sell. These changes do not affect the interest only versus principal and interest decision directly, but they do change the tax treatment of your cash flow, which may influence how much flexibility you need in your repayment structure.
Using Equity to Fund Your Next Purchase
Once you have built equity in your first investment property, you can use that equity as a deposit for your next purchase without selling. Lenders will assess your borrowing capacity based on your rental income, personal income, and existing debts, then allow you to borrow against the equity in your property up to a certain loan to value ratio. Keeping your loan on a variable rate with redraw or offset gives you the flexibility to access that equity when you are ready.
In our experience, investors who plan to grow a portfolio benefit from keeping their loan structure as flexible as possible. If you lock into a fixed rate and then want to refinance to access equity, you may face break costs that eat into the benefit of the new purchase. A variable rate lets you refinance or restructure without penalty, which becomes important as your portfolio grows and your needs change.
How Rental Income Affects Your Borrowing Capacity
Lenders typically assess rental income at 80% of the actual or expected rent to account for vacancy periods and management costs. If your property rents for $600 per week, the lender will use $480 per week in their servicing calculation. That rental income is added to your personal income, and your existing debts, including the new investment loan repayment, are subtracted to determine how much you can borrow.
If you are buying in an area with strong rental demand, such as inner Brisbane suburbs like Newstead or Fortitude Valley, vacancy risk is lower and rental income is more stable. If you are buying in a regional area with higher vacancy rates, lenders may apply a more conservative assessment, which can reduce your borrowing capacity. Understanding how your rental income is assessed before you make an offer helps you avoid situations where the loan amount you need exceeds what the lender will approve.
Call one of our team or book an appointment at a time that works for you to discuss which loan structure suits your investment strategy and how to set up your finance to support portfolio growth.
