Why Variable Rate Investment Loans Could Work for You

A variable rate investment loan gives you flexibility to make extra payments, access redraw facilities, and adjust your strategy as your financial situation changes.

For someone entering the property market with a smaller deposit, that flexibility matters because your circumstances are likely to shift over the next few years. You might receive a pay rise, change jobs, or decide to sell and upgrade. A variable rate structure lets you respond to those changes without penalty.

What Makes Variable Rates Different from Fixed Rates

Variable rates move up or down based on changes set by your lender, usually in response to shifts in the official cash rate. Fixed rates lock in a set interest rate for a period, typically between one and five years.

The trade-off is control versus certainty. Fixed rates protect you from rate rises during the fixed period, but they also restrict what you can do with the loan. Most fixed rate products limit extra repayments to around $10,000 per year and charge break costs if you need to exit early. Variable rates don't impose those restrictions, so you can pay down the loan faster, access redraw if needed, or refinance without penalty.

For property investors, variable rates also mean you can switch between principal and interest and interest only repayments more easily, which can be useful if you're managing cash flow or planning to expand your portfolio.

Why Flexibility Matters When You're Starting with a Smaller Deposit

When you're buying an investment property with a deposit under 20%, you're likely paying Lenders Mortgage Insurance. That upfront cost, combined with stamp duty and other settlement expenses, means your cash reserves are often stretched in the first year or two.

A variable rate loan lets you redirect surplus income back into the loan when you have it, then access those funds through redraw if an unexpected cost comes up. Consider a buyer who purchased a unit in Oakleigh with a 10% deposit. In the first year, rental income covered most of the mortgage, but a hot water system failed three months after settlement. Because the loan had a redraw facility, they were able to access $3,000 from previous extra payments without applying for a separate personal loan or using a credit card at a higher rate.

That kind of flexibility is harder to find in a fixed rate structure, where extra payments are capped and access to those funds is either limited or not available at all.

How Offset Accounts Work on Variable Investment Loans

An offset account is a transaction account linked to your investment loan. The balance in the offset reduces the amount of interest you're charged, but it's not actually paid into the loan itself.

For investment properties, offset accounts are particularly useful because they preserve your ability to claim interest deductions while still reducing your interest cost. If you pay extra money directly into the loan and later redraw it for personal use, you can lose the tax deductibility on that portion of the loan. But if you park that money in an offset account instead, the funds remain separate and accessible without affecting your deductions.

In our experience, investors who are also managing a primary residence often use an offset account to hold their emergency fund or savings for the next deposit. The money works to reduce interest on the investment loan, but it's still liquid if they need it.

Not all variable rate products include an offset account, and those that do sometimes charge a higher interest rate or an annual fee. It's worth comparing the cost of the offset against the interest you'll save, especially if your offset balance is likely to be low in the early years.

Interest Only Repayments and When They Make Sense

Most variable rate investment loans give you the option to switch to interest only repayments for a set period, usually up to five years at a time. During that period, you're only paying the interest charges, not reducing the loan balance.

This lowers your monthly repayment, which can improve cash flow if rental income doesn't fully cover the mortgage. It also means more of your interest cost remains tax deductible, which can be an advantage if you're using negative gearing as part of your strategy.

Interest only doesn't mean you can't make extra payments. On a variable rate loan, you can still pay above the minimum and access those funds through redraw. The difference is that the minimum repayment is lower, so you're not locked into a higher payment if your income drops or if the property sits vacant for a few weeks.

From 1 July 2027, negative gearing rules will change for established residential properties purchased after Budget night in May 2026. Losses from those properties will only be deductible against rental income or capital gains from residential property, not against salary or wages. If you purchased before that date, the existing arrangements still apply. New builds continue to be incentivised under both negative gearing and capital gains tax rules, so the structure of your loan might differ depending on the type of property you're buying.

Rate Discounts and How They're Applied

Most lenders advertise a standard variable rate, then apply a discount based on your loan size, deposit, and whether the property is owner-occupied or for investment. The discount is usually expressed as a percentage below the standard rate.

Investor rates are typically higher than owner-occupier rates, and the discount tends to be smaller if your deposit is under 20%. But the discount isn't fixed for the life of the loan. Some lenders review your rate annually, and if you've built up equity or your loan balance has grown, you might be able to negotiate a better discount.

We regularly see clients who've been on the same rate for three or four years without realising their lender has introduced lower rates for new customers. If you're on a variable rate, it's worth reviewing your rate at least once a year, either with your broker or directly with your lender. If your circumstances have improved, you might be able to request a better rate without needing to refinance.

Portability and What It Means If You Sell

Portability lets you transfer your existing loan to a new property if you sell the current one. It's a feature offered on most variable rate loans, but not all lenders handle it the same way.

If you're planning to sell your first investment property and use the proceeds toward a second one, portability can save you from paying discharge fees and application fees for a brand new loan. It also means you keep your existing rate discount, which can be valuable if rates have risen since you first borrowed.

The process usually involves notifying your lender before settlement, then applying to transfer the loan to the new property. The lender will reassess your borrowing capacity and the property's value, so it's not automatic, but it's generally faster than starting from scratch.

If you're holding multiple properties, portability also gives you the option to consolidate loans or split them across different securities, which can be useful as your portfolio grows.

Switching Between Variable and Fixed Within the Same Loan

Some lenders let you split your loan so that part of it is on a variable rate and part is fixed. This is sometimes called a split rate structure.

The benefit is that you get some protection from rate rises on the fixed portion, while still keeping access to variable rate features like redraw and offset on the rest. You can usually choose the split percentage, such as 50/50 or 70/30, depending on how much certainty you want versus how much flexibility you need.

Split rate structures work well for investors who want to lock in a portion of their repayments for budgeting purposes but still want the ability to make extra payments or access funds. It's also a way to test both structures without committing fully to one or the other.

If you're coming off a fixed rate and aren't sure whether to fix again, splitting the loan can give you time to see how variable rates move before making a decision. Just keep in mind that each portion of the loan is treated separately, so you'll have two sets of terms and conditions to manage.

Comparing Variable Investment Loan Features Across Lenders

Not all variable rate investment loans offer the same features. Some include offset accounts and unlimited redraws at no extra cost. Others charge package fees or higher rates to access those features.

When comparing investment loan options, look at the rate itself, but also at what's included. A loan with a slightly higher rate but a full offset account and no ongoing fees might cost you less overall than a loan with a lower rate and limited features.

You should also check the minimum loan amount for certain features. Some lenders only offer offset accounts or interest only options if your loan is above a certain threshold, which can be a barrier if you're borrowing a smaller amount with a limited deposit.

If you're applying with a deposit under 20%, check whether the lender's variable rate product allows for LMI to be capitalised into the loan or whether it needs to be paid upfront. Capitalising LMI increases your loan amount, but it preserves your cash for other costs like furniture, repairs, or holding a buffer for vacancies.

Call one of our team or book an appointment at a time that works for you. We'll walk through the variable rate products available for your deposit size and help you compare features across lenders without the guesswork.

Frequently Asked Questions