Investment Loans: The Pros and Cons of Fixed Rates

Investment loans structured with fixed interest rates and offset accounts present distinct regulatory, serviceability and taxation considerations that property investors in Canberra must evaluate prior to selecting a financing arrangement.

Fixed Rate Investment Loan Products: Regulatory Classification and Capital Treatment

Fixed rate investment loan products are assessed by authorised deposit-taking institutions under Prudential Standard APS 112, which prescribes risk-weighted asset treatment based on loan-to-valuation ratio, occupancy status and repayment structure. Investment loans generally attract higher risk weights than owner-occupied loans at equivalent LVR thresholds, which translates to increased capital costs for lenders and consequently higher investor interest rates. Consider a property investor acquiring a residential investment property in Braddon who applies for a fixed rate loan at 85 per cent LVR on an interest only basis. The institution will classify this exposure as an investment loan under APS 112 and apply the corresponding risk weight. The fixed interest rate period, typically ranging from one to five years, locks the borrower into a specified rate regardless of subsequent Reserve Bank cash rate movements. Upon expiry of the fixed period, the loan reverts to the lender's standard variable rate unless the borrower elects to refix or refinance to an alternative product.

Investment loan options with fixed rates do not eliminate interest rate risk. They defer it. Break costs may apply if the borrower discharges or materially reduces the loan amount prior to the end of the fixed term, calculated with reference to the difference between the contracted fixed rate and the lender's prevailing wholesale funding cost for the residual fixed period. Lenders are required under the National Consumer Credit Protection Act 2009 to disclose break cost methodology at loan origination, but the quantum remains contingent on market conditions at the time of early repayment.

Offset Account Functionality on Fixed Rate Investment Loans: Product Limitations

Offset accounts reduce interest charges by offsetting the daily account balance against the outstanding loan amount for interest calculation purposes. Most fixed rate investment loan products do not permit full offset functionality. Where offset facilities are available on fixed rate loans, they are generally capped at partial offset rates, such as 40 per cent or 60 per cent of the balance, or attract a higher fixed interest rate than equivalent non-offset products. Variable rate investment loans typically support full 100 per cent offset without restriction. The offset balance does not reduce the loan amount for the purpose of calculating the loan-to-valuation ratio under Prudential Standard APS 112. An investor holding an investment property loan with an offset account must ensure that funds in the offset account are sourced from investment-related or other assessable income streams to maintain deductibility of the full loan interest expense. Commingling personal funds in an offset account linked to an investment loan does not affect the deductibility of interest provided the loan purpose remains wholly for income-producing purposes. The Australian Taxation Office position, as set out in Taxation Ruling TR 2023/1, is that interest deductibility is determined by the use of borrowed funds, not by the presence or composition of offset balances.

Debt-to-Income Limits and Serviceability Requirements for Investment Borrowing

All authorised deposit-taking institutions are required to assess new investment loan applications using a minimum serviceability buffer of 3.0 percentage points above the loan product rate. In addition, debt-to-income lending limits apply from 1 February 2026, restricting each institution to lend no more than 20 per cent of new investor loans to borrowers with a total DTI ratio of six times or greater. These limits apply separately to the investor lending portfolio and are measured quarterly. A Canberra-based investor with gross annual income of $120,000 seeking to borrow $750,000 for an investment property in Lyneham would present a DTI ratio of 6.25. This application would fall within the restricted cohort and may only proceed if the lender has not exhausted its quarterly allocation for high DTI investor lending. The serviceability assessment must also account for existing debt commitments, rental income at a discounted rate to allow for vacancy, and projected holding costs including body corporate fees, council rates, insurance and property management. Fixed rate investment loans are serviceability-tested at the fixed rate plus the 3.0 percentage point buffer, not at the revert rate.

Negative Gearing: Legislative Framework Effective from the 2027-28 Income Year

Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received royal assent on 26 June 2026, losses from established residential investment properties acquired after 7:30pm AEST on 12 May 2026 are deductible only against income from residential properties from the 2027-28 income year onward. Properties held at 12 May 2026, including those under contract awaiting settlement at that time, remain grandfathered under the prior negative gearing rules and may continue to deduct losses against all assessable income. Eligible new builds acquired after 12 May 2026 are also exempt from the restriction and may deduct losses against all income. Canberra investors acquiring established investment properties from 13 May 2026 must model cash flow on the basis that interest and other holding costs in excess of rental income can only be offset against rental income from other properties or against capital gains on residential property disposal. Excess losses are carried forward and remain available to offset future residential property income. Interest on fixed rate investment loans remains deductible to the extent the loan is used to acquire or hold the rental property, regardless of whether the investor selects a fixed or variable rate product.

Capital Gains Tax: Indexation and Minimum Tax Rate from 1 July 2027

From 1 July 2027, capital gains accruing on residential investment properties are subject to cost base indexation using the Consumer Price Index and a 30 per cent minimum tax rate on real capital gains. The 50 per cent CGT discount continues to apply to gains accruing before 1 July 2027. For properties acquired before 1 July 2027 and disposed of after that date, gains are apportioned and taxed under the applicable regime for each period. Investors may obtain a market valuation as at 1 July 2027 or apply an Australian Taxation Office apportionment formula. Consider a scenario in which an investor acquired a residential investment property in Gungahlin in early 2026 using a fixed rate investment loan and disposes of the property in 2029. The portion of the capital gain attributable to the period before 1 July 2027 is subject to the 50 per cent discount. The portion accruing after 1 July 2027 is indexed for inflation and subject to the 30 per cent minimum rate if the investor's marginal rate on that indexed gain is below 30 per cent. Eligible new build properties retain access to both the 50 per cent discount and the indexed treatment, with the investor selecting the more favourable option at disposal. The Income Tax Rates Amendment (Tax Reform No. 1) Act 2026 imposes the minimum rate and commenced on 26 June 2026. Investors considering fixed rate products must account for the taxation of future gains when modelling after-tax returns.

Lenders Mortgage Insurance: Cost and Regulatory Treatment on High LVR Investment Loans

Lenders Mortgage Insurance is generally required on investment loan applications where the loan-to-valuation ratio exceeds 80 per cent. The premium is calculated on a sliding scale based on loan amount and LVR and is a cost borne by the borrower, either capitalised into the loan amount or paid upfront. State and territory stamp duty may be payable on the LMI premium depending on jurisdiction. Under Prudential Standard APS 112, an authorised deposit-taking institution may reduce its credit risk capital requirement where the exposure is covered by eligible LMI. To qualify, the insurance must provide cover for all losses up to at least 40 per cent of the higher of the original loan amount and the outstanding loan amount and must be provided by a lenders mortgage insurer regulated by the Australian Prudential Regulation Authority. An investor seeking a fixed rate investment loan at 90 per cent LVR to acquire a property in Campbell will incur an LMI premium that may exceed $10,000 on a loan amount above $500,000. This premium is not deductible as a single expense in the year incurred but may be deductible over five years or the term of the loan, depending on the investor's election and the Australian Taxation Office treatment. Investors should confirm the deductibility treatment with a registered tax agent prior to lodgement.

Interest Only Repayment Structure: Interaction with Fixed Rates and Prudential Classification

Interest only repayment structures are commonly selected by property investors to maximise deductible interest and preserve cash flow for portfolio growth or offset against other investments. Fixed rate investment loans may be structured on an interest only basis for a specified period, typically one to five years. Under Prudential Standard APS 112, a long-term interest-only residential loan is classified as non-standard where the LVR exceeds 80 per cent and the contractual interest-only period is greater than five years or not specified. Non-standard classification attracts higher risk weights and capital costs. A Canberra investor structuring a fixed rate investment loan on an interest only basis at 82 per cent LVR with a three-year interest only term will remain within standard loan classification provided all other serviceability and security requirements are met. Upon expiry of the interest only period, the loan typically reverts to principal and interest repayments unless the borrower negotiates an extension. The combination of fixed rate expiry and interest only expiry occurring simultaneously presents refinancing risk, particularly in rising rate environments or where property values have declined and the investor is unable to demonstrate sufficient serviceability for a further interest only extension. Investors selecting fixed rate interest only products should model repayment capacity at principal and interest levels and at variable rates to ensure ongoing serviceability.

Foreign Investment Restrictions: Impact on Investment Loan Demand and Lender Appetite

Foreign persons, including temporary residents and foreign-owned companies, are banned from purchasing established dwellings in Australia from 1 April 2025 to 30 June 2029 under the Foreign Acquisitions and Takeovers Act 1975. The ban was extended by two years and three months in the 2026-27 Budget. Limited exceptions apply, including eligible new builds, vacant land and investments that significantly increase housing supply. Temporary residents can apply for Foreign Investment Review Board approval to purchase new dwellings. This restriction has reduced foreign investor demand for established residential investment properties, particularly in Canberra submarkets such as the inner north and Woden Valley where foreign buyers previously represented a material proportion of investor purchasers. Domestic investors may benefit from reduced competition in certain price segments, although lender appetite for high LVR investment loans remains constrained by debt-to-income limits and prudential capital requirements. Investment loan products for eligible new builds may attract more favourable pricing or higher maximum LVR thresholds given the exemption from negative gearing restrictions and the retention of CGT discount treatment. Investors should confirm the classification of a property as an eligible new build prior to contract exchange to ensure access to grandfathered taxation treatment.

OAUM Securities holds an Australian Credit Licence and provides access to investment loan options from authorised deposit-taking institutions and non-ADI lenders across Australia. Property investors in Canberra requiring a compliant assessment of fixed rate and offset account suitability in the context of current prudential standards and taxation legislation should call one of our team or book an appointment at a time that works for you.

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