Fixed rate interest-only home loans explained
Some investors choose to combine a fixed interest rate with interest-only repayments on their investment property loan. To understand why this type of loan could be worth considering, let’s take a look at each of the main aspects and how they work.
How does a 5-year fixed rate investment home loan work?
A 5-year fixed rate investment home loan means you ‘lock in’ your interest rate for that period, before reverting to a variable rate (unless you refinance). Your repayments will be fixed during that time and you’ll be protected from sudden rate rises.
The main downside is that you won’t benefit from potential rate cuts or have access to as many loan features as you typically would with a variable rate investment home loan.
Still, investors seeking certainty may prefer an investment home loan with a fixed interest rate and predictable repayments than one with bells and whistles.
What is an interest-only investment loan?
Interest-only is a repayment option on your investment home loan where you pay the interest component for a set period (up to five years), not the loan balance.
Interest payments on investor home loans are tax deductible. Many investors choose interest-only repayments to maximise their tax deduction while lowering their mortgage repayments. This can free up cashflow to re-invest into the property and build equity, or invest elsewhere.
It’s important to note that during the interest-only period, you're not reducing the principal balance, which means you'll need a plan to repay the loan amount eventually.
At the end of the interest-only period, investors generally have the following options:
- Switch to principal and interest (P&I) repayments to pay both the loan principal and interest, resulting in higher repayments
- Refinance to a new interest-only period (and further delay principal repayments)
- Refinance to access usable equity in the property (if any)
- Sell the property for a profit at the end of the interest-only period
Mansour Soltani , Home Loans Expert
"When choosing an investment loan, you should always have an exit strategy in line with the loan product you choose. For example, if you're planning on purchasing and selling your property within five years and you're expecting significant capital growth, then you could opt for a five-year interest-only home loan. Each investor will have a different goal, so when in doubt, speak to a financial adviser or mortgage broker about your options."
Mansour Soltani , Home Loans Expert
What is a good 5-year fixed rate on an interest-only investment home loan?
The best 5-year fixed investment loan with interest-only repayments rates will depend on your deposit (or equity), loan amount and credit profile.
To give you an idea of what’s available right now:
- The lowest 5-year fixed rate for interest-only investment home loans on Money’s database is: 0% (comparison rate 3.94%)
- The average 5-year fixed rate on interest-only investment home loans on Money’s database: 6.5%
Investment home loans generally have higher interest rates because investors are considered riskier borrowers than owner-occupiers.
Investment home loan features
Extra repayments
Make additional repayments on top of your minimum mortgage repayments. Some fixed rate home loans may have a limit on extra repayments or charge fees for the privilege. Investors can make extra repayments on their home loan to pay it off faster and save on interest.
Redraw facility
Allows you to withdraw any extra repayments you've made on your home loan. Investors can use their redraw facility to finance renovations on the property, fund other investments or cover expenses. Redraw fees may apply.
Offset account
An offset account is a transaction account linked to your investor home loan account to reduce interest payable. The balance in your offset account goes towards offsetting your mortgage balance and interest. Investors can use the money in their offset account as they please. Generally, the lowest-rate fixed loans tend not to offer offset accounts, and if they do, there will be a higher interest rate or fee applied.
Repayment frequency
You can choose your repayment frequency (e.g. weekly, fortnightly, or monthly) or opt for an interest-only repayment option for a period of time.
Should you choose a fixed or variable rate for your investment home loan?
Mansour Soltani , Home Loans Expert
“It really depends on the market and what rates you can access. If the rates are historically high, fixing for multiple years mightn’t be a great option. This is because there are significant break costs if the rates drop and you refinance. If you want peace of mind and are adamant about fixing your rate, then you could consider splitting your home loan 50/50, fixed and variable. That way, you get the best of both worlds and hedge your bets.”
Mansour Soltani , Home Loans Expert
How to compare investment property home loans
1
Look at the advertised rate
Compare the advertised rate of different investor home loans to estimate your interest-only monthly repayments. While a low interest rate is important, it's not the only factor to consider. Other aspects like loan features, fees, and your loan term will also impact your hip pocket.
2
Check the comparison rate
You must also look at the comparison rate, which shows the true cost of a home loan, including interest and fees. Your actual individual rate may differ depending on your loan-to-value ratio (LVR) and loan amount.
3
Consider home loan fees
Some of your home loan fees may be tax deductible, but you should still look at an investment loan with lower fees and a simple fee structure to make budgeting and record keeping easier.
4
Choose the right home loan features
Property investors often look for a home loan with an offset account (or multiple offset accounts) to save on interest and a redraw facility to access additional repayments. These are the most valuable home loan features for an investor. Keep in mind fixed rate investment home loans don’t come with as many features as their variable rate counterparts.
How long can you fix an investment home loan for?
Lenders typically offer fixed rate terms on investment home loans of one to five years. Check out our guides on:
