The best 1-year fixed investor home loans

ALASDAIR DUNCAN
If you’re in the market to purchase an investment property and rent it out, then one major decision you may need to make is how you structure your home loan repayments. A one-year fixed investor home loan might be one option, but what does this mean, and what are the potential advantages and drawbacks?

There are three broad categories of home loans available in Australia:

  • fixed-rate loans, where the interest repayments remain steady from month to month
  • variable-rate loans, where the interest can go up and down depending on the lender’s decisions
  • split loans, which are a combination of the two.

If you’re contemplating a one-year fixed investor loan, here are some things that might help you make your decision.

What is a 1-year fixed investor home loan?

A one-year fixed investor home loan is one in which the interest rate you’ll pay on the loan is locked in or ‘fixed’ for a period of a year. This means that your required repayments will remain the same for that entire period of time, irrespective of whether your lender chooses to raise or lower interest rates.

Generally speaking, if you are purchasing a property as an investor, your lender may ask you to pay a slightly higher interest rate and offer a lower loan-to-value ratio (LVR) than if you were purchasing a home to live in. This is because lenders can view investor home loans as slightly riskier than loans of other occupiers.

In other ways, though, one-year fixed loans for investors are similar to those for owner occupiers.

What are potential advantages of a 1-year fixed investor home loan?

There can be a number of potential advantages to fixing the home loan rate for your investment property for one year, including:

  • The certainty of knowing that your repayments will remain stable, and will not fluctuate from month to month, no matter what official interest rates do.
  • Protection from interest rate rises, if your lender decides to raise their interest rates within the one-year period of your loan.
  • Potential savings because fixed rate loans usually come without features like offset accounts and redraw facilities, so don’t often have the associated fees and charges either.

What are the potential drawbacks of a 1-year fixed investor home loan?

Fixing the loan rate for your investment property, whether you choose to do it for one year or longer, can also come with some drawbacks. These include potential to:

  • miss out on a lower interest rate if your lender decides to drop their rates, but yours is locked in
  • be charged break fees if you need to break out of your loan or choose to refinance
  • miss out on features such as offset accounts and redraw facilities, as these can be convenient
  • be penalised for making additional repayments on your home loan (although it is worth noting that some lenders may allow you to make payments above and beyond your standard monthly repayment on a fixed rate loan)

Can you break a 1-year fixed home loan?

It is generally possible to break a one-year fixed home loan, depending on the terms and conditions of the loan, but it is likely that your lender will charge you a ‘break cost’ or a ‘break fee’. This is an amount of money that is intended to compensate the lender for lost profits they may experience as a result of your contract ending early.

Break fees may vary in cost. A lender may consider the interest rate you locked into (compared with the current interest rate), how much time remains on your fixed-rate term, and the loan amount you originally borrowed.

How long can you fix a home loan for?

The length of time you choose to fix a home loan can be relatively flexible. Depending on your needs and priorities, you could choose to lock your rate in place for a shorter period like one or two years, or a longer one like five or even 10 years. The length of time you choose to lock in your home loan rate will ultimately be a matter of negotiation between you and your lender, based on your home loan.

How do you lock in a low interest rate?

When you take out a one-year fixed home loan for your investment property, or any fixed rate home loan for that matter, it is important to be aware that your interest rate will typically be locked in at the date you settle on the property, not on the date that you applied.

This can mean that if interest rates have changed between the time you apply for a fixed home loan and the time you are approved, the interest rate you pay could be higher or lower than you originally anticipated. In recognition of this, some lenders will allow you to lock in a guaranteed rate prior to settlement, although you may be required to pay a fee for this.

What happens at the end of a fixed investor home loan term?

When any fixed home loan comes to an end, whether you locked your rate in for a year or longer, it’s typically the case that you will revert to a variable rate home loan. This means the interest you pay will go up or down, depending on your lender’s decisions, and other market forces, such as what the Reserve Bank of Australia (RBA) has set as the official cash rate.

If you are happy to remain on a variable interest rate, you could choose to do this, or alternatively, you could refinance with your existing lender or another to move your loan onto a different fixed rate, or even a split fixed-variable one.

What happens if you misrepresent yourself on your investor home loan application?

When borrowing money to purchase an investment property, it is very important to be upfront about the purpose of the loan on your application. Lying on a home loan application can have serious consequences, and if you tell your lender that you are planning to live in a property but they find out you are planning to rent it out, they are likely to reject your application. In addition to being rejected, lying on an application may lead to a black mark on your credit score, which could make other institutions reluctant to lend to you in future.

If you successfully take out an owner occupier loan but instead use your property as a rental, there can also be consequences. Lenders have the right to recall home loans if they find out that an applicant lied on their application. This means that if you are found to have misrepresented yourself, your lender may give you 30 days to pay off the balance of your loan, after which time the property could be sold off to repay the debt.

How do you compare variable rate investor home loans?

If you’re in the market for an investment property and wondering about available one-year fixed rate loans for investors, you can start your search by comparing home loans with Canstar. Each year, Canstar gives out Home Loan Awards to the lenders that offer outstanding value to Aussie home buyers. The winning providers in the Investment Fixed Home Lender Award category may be able to offer you an investor home loan at a competitive rate.

Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD.

Cover image source: Tirachard Kumtanom/Shutterstock.com


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