Beginner's Guide to Variable Rate Investment Loans

What Is a Variable Rate Investment Loan?

A variable rate investment loan is a mortgage where the interest rate can move up or down over the life of the loan, changing your repayment amount accordingly. The rate is set by the lender and typically moves in response to changes in the official cash rate, funding costs, and competitive positioning. Variable rate products generally offer more flexible features than fixed rate loans, including redraw facilities, offset accounts, and the ability to make extra repayments without penalty.

For Morley investors looking at established properties around Crimea Street or newer townhouses near Galleria Shopping Centre, variable rate loans remain the most common financing structure. Around 70 per cent of residential investment loans in Australia are currently on a variable rate, according to lending data, partly because investors value the flexibility to adjust their strategy as the portfolio grows.

Offset Accounts and How They Actually Save You Money

An offset account is a transaction account linked to your investment loan where the balance reduces the amount of interest you pay. If you have a loan of $500,000 and $30,000 sitting in a 100 per cent offset account, you only pay interest on $470,000. The interest saving is calculated daily, so even short-term deposits make a difference.

Consider a Morley investor who owns a three-bedroom brick and tile unit near the Noranda shops, rented at $520 per week. The rental income flows into the offset account linked to their variable rate loan. Over the course of a year, the average offset balance might sit at $18,000. At current variable rates for investment loans, that balance could save around $900 to $1,100 in annual interest, depending on the lender and rate tier. Those savings compound over time and can be reinvested or used to reduce the loan faster.

Not all lenders offer 100 per cent offset accounts on investment loans. Some offer partial offset accounts, where only a portion of the balance reduces your interest. Others charge a higher interest rate or annual fee for the offset feature. When comparing investment loans, check whether the offset is included in the base rate or comes at a premium.

Redraw Facilities and Extra Repayments

Most variable rate investment loans allow you to make extra repayments and withdraw those funds later through a redraw facility. Extra repayments reduce the loan balance, which lowers the interest charged each day. Redraw gives you access to those extra funds if you need them for another deposit, renovation, or short-term cash flow.

Some lenders cap the number of free redraws per year or charge a fee for each withdrawal. Others allow unlimited online redraws at no cost. A few lenders set a minimum redraw amount, such as $500 or $1,000, which can be restrictive if you need smaller amounts. Always confirm the redraw terms before committing to a product, particularly if you plan to use the facility regularly as part of your property investment strategy.

Interest Only Repayments on Variable Rate Loans

Interest only repayments mean you pay only the interest component of the loan each month, not the principal. The loan balance stays the same during the interest only period, which is typically one to five years. After that, the loan reverts to principal and interest repayments unless you apply to extend the interest only term.

Interest only structures are common on investment loans because they lower the monthly repayment, which improves cash flow and can help offset rental income against other expenses. For Morley investors holding properties in areas with strong capital growth potential, such as the pockets near Morley Drive and Walter Road West, keeping repayments low early on allows more flexibility to reinvest or manage vacancy periods without financial strain.

Under the current prudential framework, lenders assess interest only applications more conservatively than principal and interest loans. The loan attracts a higher risk weighting, which typically translates to a higher interest rate, often around 0.20 to 0.40 percentage points above the equivalent principal and interest variable rate. Some lenders also cap interest only lending at 80 per cent loan to value ratio, while others will lend up to 90 per cent with Lenders Mortgage Insurance, depending on the borrower's overall financial position.

Split Loan Structures

A split loan allows you to divide your total borrowing between variable and fixed rate portions. You might put 60 per cent of the loan on a variable rate with an offset account and fix the remaining 40 per cent for rate certainty. This structure gives you partial protection against rate rises while keeping access to flexible features on the variable portion.

Splits are particularly useful for investors who want to lock in part of their repayment cost but still need liquidity for future purchases or portfolio adjustments. When you refinance an investment loan, a split structure can also help you manage the transition if part of your borrowing is still within a fixed rate period and subject to break costs.

Rate Discounts and How They Are Applied

Variable rate investment loans are typically priced as a base rate minus a discount. The discount you receive depends on the loan amount, your deposit size, the property type, and the lender's current pricing. Larger loans and lower loan to value ratios generally attract bigger discounts.

Discounts are not always locked in for the life of the loan. Some lenders reserve the right to reduce your discount over time, particularly if you do not maintain other banking products with that institution or if your loan balance falls below a certain threshold. A few lenders offer a loyalty discount that increases after a set number of years, but these are less common on investment loans than on owner-occupied products. If rate competitiveness matters to you over the long term, regular loan health checks help ensure your discount has not eroded.

Portability and Substituting Security

Portability allows you to transfer your existing loan to a new property without discharging and reapplying. This can save on discharge fees, application fees, and valuation costs. Some lenders also allow you to substitute the security property, meaning you sell the original investment property and replace it with a new one while keeping the same loan.

Not all variable rate products offer portability, and those that do often impose conditions, such as requiring the new property to be of similar or greater value, settling within a specific timeframe, and meeting current serviceability criteria. If you plan to turn over properties within your portfolio or upgrade to higher-value assets in suburbs beyond Morley, confirm whether portability is included and what the process involves.

What Happens When Rates Move

When the Reserve Bank changes the cash rate, most lenders adjust their variable rates within days or weeks. Your repayment amount changes accordingly, and the lender is required to notify you in writing. On an interest only loan, the entire repayment change reflects the rate movement. On a principal and interest loan, the change is spread across both components.

Because investment loan interest is generally tax deductible, a rate rise increases your claimable expense, which partly offsets the higher repayment cost. The deduction is claimed in your tax return based on the actual interest paid during the financial year. If rental income does not cover the full repayment, the shortfall is deductible against your other income, subject to the negative gearing rules that apply to your property based on when it was acquired. Properties held before 12 May 2026 continue to benefit from full negative gearing, while properties purchased after that date are subject to the new quarantining rules from the 2027-28 income year.

Call one of our team or book an appointment at a time that works for you. We work with Morley residents to compare investment loan options from lenders across Australia and structure your finance around the features that actually matter for your portfolio.

Frequently Asked Questions