Reducing Interest Rate Risk When Investing In Property

Learn the strategies investors use to reduce their interest rate risk when investing in property.

Property interest rates have been one of the most brutal curveballs for investors lately. Just a couple of years ago, we were riding the wave of sub-2% rates.

Fast forward to now, and we’re staring down 6%, and for many, that rise has torpedoed their investment cash flow.

But while you can’t control where the Reserve Bank sets the official cash rate or what banks decide to charge, you can control how you structure your loan.

And how you structure it might just be the difference between riding out the storm or getting swamped.

The Problem: Rising Rates, Sinking Cashflow

Back in July 2021, mortgage rates hovered around 2%. That meant investment properties were much more likely to be cashflow positive, where the rent more than covers the mortgage.

Now? In many cases, it’s flipped. With interest rates up, mortgage payments are chewing through rental income and pushing properties into negative cashflow territory.

That’s a tough pill to swallow, especially for investors relying on income to service debt.

Fixed vs Floating: Know Your Tools

Let’s start with the basics. When you borrow from a bank, you’ll usually pick between:

• Fixed Rate: Lock in a set interest rate for a defined period (e.g., 1, 2, or 3 years). Predictable payments, but no flexibility
  

• Floating Rate: Your interest rate moves with the market. Flexibility to repay or refinance, but you’re at the mercy of market hikes
  

Floating rates are typically higher and more volatile, which is why most investors lean toward fixed terms.

But choosing how long to fix for, well, that’s where the game gets interesting.

Why “Splitting” Your Loan Reduces Risk

Fixing all your debt for the same term might seem smart when rates are low. But what happens when that term ends, right when rates have spiked?

Your payments will rise quickly.

A smarter strategy is to split your loan across multiple fixed-rate terms.

Think of it like diversifying your investment portfolio, you’re spreading your exposure so you’re not rolling the dice on one big refix all at once.

Case Study: A vs B: Who Played It Better?

Let’s say it’s 2021 again. Interest rates are at historic lows, and the investor has taken on a $480,000 mortgage.

The Setup:

• Property purchase: $600,000
  

• Loan: $480,000 (80% LVR)
  

Investor A:

• Fixes the entire $480,000 at 2% for 1 year.
  

Investor B:

• Splits loan:

  • $200,000 fixed at 2% (1 year)
    

  • $200,000 fixed at 3% (2 years)
    

  • $80,000 fixed at 4% (3 years)
    

Year 1 Interest Costs:

• Investor A: $480,000 × 2% = $9,600
  

• Investor B:

  • 200k × 2% = $4,000

  • 200k × 3% = $6,000

  • 80k × 4% = $3,200→ Total = $13,200

    
    

Investor A wins in year one. Lower rates, lower payments. But this is the calm before the storm.

Year 2: Rates Jump to 6% Across the Board

Time to refix. Here’s the kicker:

• Investor A has to refix the entire $480,000 at 6% → $480,000 × 6% = $28,800
  

• Investor B only needs to refix the 1-year portion at 6%. The rest is still on cheaper fixed terms: → 200k × 6% = $12,000 → 200k × 3% = $6,000 → 80k × 4% = $3,200 Total = $21,200

  
  

Investor B now pays $7,600 less in annual interest than Investor A. That’s over $630 per month back in their pocket.

And remember: these are small numbers. Scale that to a multi-million dollar portfolio, and the impact is enormous.

Why This Matters

If you’re already near your cashflow limit, any spike in repayments could put you underwater, or worse, at risk of default.

By splitting your fixed terms:

• You limit your exposure to a single rate spike
  

• You create predictable refix timelines to plan ahead
  

• You can even stagger repayments to better match your cashflow cycles
  

Final Thoughts

Interest rates will always move; it’s part of the game. What matters is how you play the game.

Rather than trying to guess where rates will go (because even economists get it wrong), focus on building resilience into your loan structure.

Splitting your mortgage isn’t just about numbers; it’s about buying yourself time, flexibility, and stability. Because in this environment, that’s more valuable than locking in a single cheap rate that comes back to bite you.

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