Everything You Need to Know About Variable Investment Loans

Variable Rates Give You Control Over Extra Repayments

A variable rate investment loan lets you make extra repayments without penalty and link an offset account to reduce the interest you pay each month. The rate moves with the market, which means your repayments can go up or down, but you keep full flexibility to pay down debt or access funds when you need them.

Consider a buyer who purchases a rental property in Kambah with a variable rate loan set to interest-only for the first five years. They link an offset account and deposit their rental income plus any surplus savings each fortnight. Every dollar in that offset account reduces the balance on which interest is calculated, lowering the monthly interest charge without reducing the deductible loan balance. When a tenant vacates and they need to cover a repair or a few weeks without rent, they withdraw from the offset account rather than drawing on a redraw or applying for new credit.

That flexibility becomes particularly valuable in the ACT market, where vacancy periods can stretch longer in winter and where body corporate levies and rates are higher than in many regional areas. An offset account acts as a buffer that keeps your borrowing cost down when funds are sitting idle and gives you instant access when holding costs spike.

How Offset Accounts Reduce Interest Without Reducing Your Deduction

An offset account is a transaction account linked to your investment loan. The balance in the offset account is subtracted from the loan balance when the lender calculates interest each day, but the loan balance itself does not change. Because the loan balance stays the same, the full interest charge remains deductible, even though you are paying interest on a lower amount.

In practice, if you have a loan balance of $500,000 and $30,000 sitting in a linked offset account, you pay interest on $470,000. The loan statement still shows $500,000 outstanding, so your deduction is calculated on the full loan amount. This is why offset accounts are preferred over making extra repayments directly onto the loan principal when the loan is for investment purposes. Reducing the principal saves interest but also reduces the amount of deductible debt, which is not what most investors want.

Offset accounts are offered by most major lenders on variable rate investment loans. Not all lenders offer a full 100 per cent offset. Some products offset only a portion of the balance or charge a higher ongoing fee. When comparing investment loan options, confirm whether the offset is full or partial and whether the monthly account fee outweighs the interest saving.

Interest-Only Repayments and How They Affect Cashflow

Interest-only repayments are common on investment loans because they keep the monthly repayment lower and preserve the deductible debt. On an interest-only loan, you pay only the interest charged each month. The loan balance does not reduce unless you make extra repayments or funds are sitting in an offset account.

Most lenders allow interest-only periods of up to five years on a residential investment loan, after which the loan converts to principal and interest repayments unless you apply to extend the interest-only term. Some lenders allow longer initial terms or multiple extensions, but policy varies and approvals depend on serviceability and loan-to-value ratio at the time of the request.

If you are holding a property for capital growth rather than immediate cashflow, the interest-only structure keeps more cash in your offset account or available for other investments. Rental income that would otherwise go toward principal repayments can be redirected into the offset, into another deposit, or into covering periods where the property is vacant. In suburbs like Narrabundah, where older units often require maintenance between tenancies, that cashflow control matters.

Variable Rates Move With the Market

Variable rates are set by the lender and typically move in response to changes in the official cash rate, funding costs, and competitive positioning. When the Reserve Bank increases the cash rate, most lenders increase their variable rates within a few weeks. When the cash rate is cut, variable rates usually fall, though not always by the same amount.

The advantage is that your rate can go down as well as up. If you lock into a fixed rate and the market falls, you are stuck paying the higher rate until the fixed term ends. With a variable rate, you benefit immediately from any reduction. The risk is that rates can rise quickly, and your repayment can increase without much notice. Most lenders provide at least 30 days' notice of a rate change.

Investors who prefer certainty over flexibility often split their loan between fixed and variable, but if you want full access to offset and redraw features, a variable rate loan is the only structure that delivers that without restriction. Fixed rate loans do not allow offset accounts in most cases, and extra repayments are either not permitted or capped.

Rate Discounts Depend on Loan Size and LVR

Lenders apply different interest rate discounts depending on the size of the loan, the LVR, and whether the loan is for owner-occupied or investment purposes. Investment loans generally sit 0.20 to 0.60 percentage points higher than equivalent owner-occupier loans, reflecting the higher risk weight applied under the prudential framework.

A larger loan amount often attracts a bigger discount off the lender's published rate. A loan above $500,000 may receive a deeper discount than a loan below $300,000, though this varies between lenders and changes regularly. LVR also plays a role. A loan at 70 per cent LVR will often receive a lower rate than the same loan at 85 per cent LVR, because the lender's capital cost and risk are lower.

When you refinance an investment loan, you have the opportunity to negotiate a new discount based on your current loan balance and equity position. In our experience, investors who have paid down debt or benefited from capital growth over several years can often secure a better rate by refinancing than by staying with their current lender, even after accounting for discharge and application fees.

Serviceability and DTI Limits Apply to All New Investment Loans

Every new investment loan is assessed at a rate at least 3.0 percentage points above the actual product rate. This serviceability buffer is set by APRA and applies across all banks and lenders regulated as authorised deposit-taking institutions. If the variable rate on offer is 6.50 per cent, the lender will assess whether you can afford repayments at 9.50 per cent.

From February this year, lenders have also been required to limit the proportion of new investment loans made to borrowers with a debt-to-income ratio of six times or more. No more than 20 per cent of a lender's new investor lending in any quarter can go to borrowers above that threshold. The limit applies to your total debt, including your owner-occupied home loan if you have one, divided by your gross income.

These settings do not stop you borrowing, but they do cap how much you can borrow relative to your income and they force lenders to assess your capacity to service the loan under a stressed scenario. If your borrowing capacity is constrained by serviceability rather than deposit, an offset account becomes even more useful because it allows you to reduce your interest cost without needing to refinance or restructure the loan.

When an Offset Account Costs More Than It Saves

Not every investor needs an offset account. If you do not expect to hold surplus cash in the account for any meaningful period, the monthly account fee and the slightly higher interest rate on a package with offset features can outweigh the saving.

Some lenders charge an annual package fee of $300 to $400 for access to offset accounts and rate discounts. If you are only holding a few thousand dollars in the offset on average, the interest saved may not cover the package fee. You would be better off with a no-frills variable rate loan that has a lower base rate and no ongoing fee.

Offset accounts make the most sense when you have irregular income, receive rent in advance, are saving for your next purchase, or need a place to park funds between settlements. They also suit investors who want to minimise interest costs without losing the deduction, which is most people once the loan balance is above $400,000 and the tax benefit becomes material.

Call one of our team or book an appointment at a time that works for you. We work with investors across the ACT and can walk you through the variable rate products and offset structures that suit your situation and your next purchase.

Frequently Asked Questions