What a Fixed Rate Lock-in Actually Commits You To
A fixed rate lock-in on an investment loan commits you to a set interest rate for a defined period, typically one to five years, regardless of market movements. During that period, your lender prices the loan based on wholesale funding costs, and if you exit early, the lender may pass on losses incurred from the difference between your rate and the current market wholesale rate. Break costs exist to compensate the lender for that difference.
Consider a prosthodontist who locks in a three-year fixed rate on a rental property loan at 5.8 per cent, then decides to sell the property 18 months later when fixed rates have fallen to 5.1 per cent. The lender faces a loss because it has to reinvest the capital returned early at the lower market rate, and that difference is passed to the borrower as a break cost. The calculation is not arbitrary but depends on the outstanding loan balance, the remaining fixed period, and the gap between your fixed rate and the prevailing wholesale rate at the time you exit.
This structure makes fixed rates useful for budgeting rental property cash flow, particularly when you expect stable occupancy and no major portfolio changes during the fixed term. It also makes them costly when circumstances shift and you need to refinance, sell, or restructure before the fixed period ends.
How Break Costs Are Calculated by Lenders
Break costs are calculated by comparing the interest rate you locked in with the lender's current wholesale funding cost for the remaining fixed period. The lender calculates the present value of the interest shortfall over the remaining term, discounted back to today's dollars. If wholesale rates have dropped since you fixed, you pay a break cost. If wholesale rates have risen, some lenders will calculate a nil break cost, though very few will pay you a credit for the difference.
In a scenario where a prosthodontist has a remaining balance of $450,000 on a fixed rate investment loan with 24 months left at 6.2 per cent, and the lender's current two-year wholesale rate is 5.4 per cent, the interest shortfall is 0.8 percentage points per year over two years. The lender discounts that shortfall back to present value using the current wholesale rate, which typically results in a break cost in the range of $6,000 to $8,000, depending on the lender's methodology and any economic cost adjustment. Some lenders include an administrative fee on top of the economic cost.
Most lenders will provide a break cost estimate over the phone or via online banking, but the figure is only locked in on the day you formally request discharge or refinance. This means the cost can shift day to day as wholesale rates move, and you should request a final quote immediately before committing to a sale or refinance timeline.
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Split Rate Structures and How They Reduce Exit Exposure
A split rate structure divides your loan into fixed and variable portions, allowing you to lock in part of your rate for budgeting while keeping flexibility on the remainder. The variable portion can be repaid or refinanced without penalty, which reduces the total exposure to break costs if you need to exit or restructure during the fixed term.
In our experience, prosthodontists with variable practice income often split their investment loan 50/50 or 60/40 between fixed and variable. The fixed portion covers the minimum repayment and provides cash flow certainty, while the variable portion absorbs extra repayments when practice income is strong or can be refinanced separately if a lower rate becomes available. If the property is sold, only the fixed portion incurs a break cost, which is calculated on the smaller balance.
This approach works particularly well when you are building a portfolio and expect to use equity from the rental property to fund a subsequent purchase within the fixed term. The variable portion can be discharged or increased without penalty, and the fixed portion remains untouched. It does require more attention at setup to ensure the split aligns with your cash flow pattern and portfolio timeline, but it avoids the scenario where a full fixed loan becomes a barrier to acting on the next opportunity.
If you are considering a split structure, discuss the mechanics with your broker before submitting the application. Lenders have different policies on how splits are structured, whether both portions sit under one facility or as separate sub-accounts, and whether you can adjust the split ratio over time. Some lenders allow you to re-fix the variable portion later without refinancing, while others treat it as a new application.
Interest-Only Fixed Periods and the Reversion Rate
Most lenders allow you to combine an interest-only period with a fixed rate on an investment loan, but the interest-only term and the fixed rate term do not have to match. If your fixed rate term is shorter than the interest-only period, the loan will revert to a variable rate while still on interest-only. If the interest-only period ends before the fixed rate expires, the loan will revert to principal and interest repayments at the fixed rate, which increases the repayment amount mid-term.
When the fixed term ends, the loan automatically reverts to the lender's standard variable rate, which is typically higher than the headline variable rate advertised to new borrowers. This reversion rate can sit 0.5 to 1.0 percentage points above the discounted variable rate available through refinancing, which is why you should review the loan at least three months before the fixed term expires.
We regularly see prosthodontists who set and forget a fixed rate loan, then find themselves on a reversion rate for 12 months or more before noticing the higher repayment. If you do not refinance or negotiate a rate reduction at the end of the fixed term, you are effectively subsidising the lender's margin on a rate that no longer reflects the market. Contact your broker or lender at least 90 days before expiry to either negotiate a new fixed or variable rate with your current lender or initiate a refinance to a more competitive product.
When Fixed Rates Make Sense for a Rental Property
Fixed rates suit investors who want repayment certainty for a defined period and do not expect to sell, refinance, or draw further equity during that term. They work well when you have stable rental income, a long hold strategy, and no immediate need to access the property's equity for another purchase or practice expense.
They are less suitable when you are actively building a portfolio, expect to sell within the fixed term, or anticipate needing to refinance to access equity or consolidate debt. In those cases, a variable rate or a split structure provides more flexibility without penalty. Fixed rates also reduce your ability to make extra repayments, as most lenders cap additional repayments on fixed loans at $10,000 to $30,000 per year before charging a break cost on the excess.
If you are locking in a fixed rate, confirm the break cost methodology with your lender in writing at settlement, including whether the lender uses an economic cost model, whether it includes an administrative fee, and how the calculation is disclosed. This avoids surprises if you need to exit early and ensures you understand the full cost of unwinding the rate before committing to the term.
Portable Loans and Whether They Avoid Break Costs
Some lenders offer portable fixed rate loans, which allow you to transfer the fixed rate from one property to another without incurring a break cost, provided the loan amount remains the same or increases. This feature can be useful if you plan to sell your current investment property and purchase another within the fixed term, but it comes with strict conditions.
The new property must settle within a defined window, typically 90 days of the old property settling, and the loan balance must not decrease. If the new property is less expensive and you repay part of the loan, you will incur a break cost on the amount repaid. If the new property is more expensive and you increase the loan, the additional borrowing is typically at a variable rate or a new fixed rate, not the original fixed rate.
Portability is not universally available and is rarely advertised prominently, so you need to confirm with your lender at the time of application whether the product includes portability and what the conditions are. In practice, the timing and settlement constraints make portability difficult to execute, and most investors end up refinancing or paying a break cost rather than relying on the portability clause.
Fixing After a Variable Period and the Re-Fix Process
You can switch from a variable rate to a fixed rate on an existing investment loan without refinancing, by requesting a re-fix with your current lender. The lender will offer you a fixed rate based on the current market at the time of the request, and the fixed term starts from the date the re-fix is processed, not from the original loan settlement date.
Re-fixing does not require a full credit assessment in most cases, but the lender may review your serviceability if the loan structure changes or if the loan is interest-only and approaching the end of the interest-only term. Some lenders charge a small administrative fee to process a re-fix, typically $100 to $300, while others do not charge at all.
If you are considering a re-fix, compare the rate your current lender offers with the rates available through refinancing to a different lender. The re-fix rate is often higher than the advertised rate for new borrowers, and refinancing may deliver a lower rate and additional features such as an offset account or higher extra repayment limits. The decision depends on whether the rate saving and feature improvement justify the cost and time of refinancing, which your broker can calculate for you based on your outstanding balance and remaining loan term.
Call one of our team or book an appointment at a time that works for you. We will walk through your current loan structure, calculate any potential break costs, and identify the most flexible rate structure for your portfolio and practice income timeline without locking you into a product that penalises you for adapting when circumstances change.
Frequently Asked Questions
What is a break cost on a fixed rate investment loan?
A break cost is a fee charged by the lender when you exit a fixed rate loan early, calculated based on the difference between your fixed rate and the lender's current wholesale funding cost for the remaining fixed period. The lender discounts this interest shortfall to present value, and you pay the economic cost of the lender's loss from reinvesting the capital at a lower rate.
Can I avoid break costs by using a split rate structure?
A split rate structure reduces but does not eliminate break costs, because only the fixed portion incurs a penalty if you exit early. The variable portion can be repaid or refinanced without penalty, so the total break cost is calculated on a smaller balance than if the entire loan were fixed.
What happens to my investment loan when the fixed rate term ends?
When the fixed term ends, the loan automatically reverts to the lender's standard variable rate, which is typically higher than the discounted rate available to new borrowers. You should review your loan at least 90 days before expiry to negotiate a lower rate or refinance to a more competitive product.
Can I make extra repayments on a fixed rate investment loan?
Most lenders allow extra repayments of $10,000 to $30,000 per year on fixed rate loans before charging a break cost on the excess. If you plan to make larger additional repayments, a variable rate or split structure provides more flexibility without penalty.
Do portable fixed rate loans avoid break costs when I sell and buy another property?
Portable fixed rate loans allow you to transfer the fixed rate to a new property without a break cost, provided the loan balance does not decrease and the new property settles within a defined window, typically 90 days. If the loan balance decreases, you will incur a break cost on the amount repaid.
