What a Variable Rate Investment Loan Actually Is
A variable rate investment loan is a loan where the interest rate can move up or down during the life of the loan, and the rental property you're buying is held as security. The lender adjusts the rate in response to changes in the official cash rate or their own funding costs, which means your repayments can change too.
Consider a buyer who purchases a two-bedroom unit near Edwardes Lake. They borrow using a variable rate product at the lender's investor variable rate. Six months later, the Reserve Bank raises the cash rate by 0.25 per cent, and the lender passes on the full increase. The monthly repayment rises accordingly, but the borrower also gains access to any future rate cuts without needing to refinance or pay break costs.
Variable rates usually sit slightly higher than fixed rates during stable periods, but the difference is the flexibility. You can make extra repayments, redraw funds if the loan allows it, and switch to a different loan product or lender without the penalties that come with breaking a fixed term. For someone building a property portfolio, that flexibility becomes more valuable over time.
Why Offset Accounts Make Sense for Reservoir Investors
An offset account is a transaction account linked to your investment loan. Every dollar you hold in the offset reduces the balance on which interest is calculated, without actually paying down the loan itself.
In Reservoir, where you might be balancing rent from a property on Cuthbert Road with your own living expenses, an offset account gives you a place to park rental income, tax refunds, or savings between expenses. If your loan balance is $450,000 and you hold $20,000 in the offset, you only pay interest on $430,000. The $20,000 stays available for withdrawal at any time, so you're not locking it away like you would with extra repayments on a loan without redraw.
The tax treatment is what makes this structure particularly useful for investors. Interest on your investment loan is generally deductible when the property is rented or genuinely available for rent, so reducing the interest you pay through an offset doesn't affect your deduction, it just lowers the actual cost. You still claim the full interest expense against your rental income, but you pay less out of pocket each month.
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How Interest Only Repayments Work with a Variable Loan
Most investors choose interest-only repayments for the first few years of an investment loan. During the interest-only period, your repayments cover only the interest charged each month, and the loan balance stays the same.
The advantage is cash flow. Your monthly outgoing is lower, which means you can hold more in your offset account or use the difference to cover other expenses like rates, insurance, or body corporate fees. In Reservoir, where older blocks near the train station often have higher body corporate levies, keeping your required repayment lower can make the difference between positive and negative cash flow each month.
Interest-only periods typically run for one to five years, depending on the lender and your loan-to-value ratio. Once the interest-only period ends, the loan converts to principal and interest repayments, and the monthly amount increases because you're now paying down the balance as well. If you want to extend the interest-only term, you usually need to apply for an extension before it expires, and approval depends on your equity position and the lender's current policy.
Loan to Value Ratio and What It Means for Your Rate
Your loan-to-value ratio is the amount you borrow divided by the lender's valuation of the property, expressed as a percentage. A lower LVR generally unlocks lower interest rates and avoids the cost of Lenders Mortgage Insurance.
If you're buying an investment property in Reservoir with a 20 per cent deposit, your LVR sits at 80 per cent, and most lenders will offer their standard investor variable rate without requiring LMI. If your deposit is smaller and your LVR is 85 or 90 per cent, you'll pay LMI as a one-off premium, and the interest rate offered may also be higher to reflect the additional risk the lender is taking on.
The LVR also affects how much you can hold in your offset before the lender starts to adjust the calculation. Under the current capital rules, offset balances don't reduce the loan amount for LVR purposes, so even if you have $50,000 sitting in your offset, the lender still treats your loan as the full borrowed amount when assessing risk and pricing your rate.
What Happens When Rates Move
Variable rates respond to changes in the official cash rate set by the Reserve Bank, but lenders don't always pass on the full movement, and the timing varies between institutions.
When the cash rate rises, your repayment usually increases within a few weeks. When it falls, your repayment drops, though some lenders are slower to reduce rates than they are to raise them. The benefit of a variable loan in a falling rate environment is that you gain the reduction automatically, without needing to refinance your investment loan or renegotiate terms.
In our experience, investors with variable loans often review their rate annually to check whether their lender is still competitive. If your rate has drifted above the market average for your LVR and loan size, you can either negotiate with your current lender or refinance to a new one. Because variable loans don't have break costs, switching is usually just a matter of covering application fees and valuation costs with the new lender.
Structuring Loans Across Multiple Properties
Once you own more than one property, keeping each loan separate in its own split can make tax time much clearer and give you more control over repayments and offset balances.
As an example, someone who already owns a home in Reservoir and wants to buy a second property as an investment in Thomastown might set up two separate variable rate loans, one for each property, even if both are with the same lender. Each loan has its own offset account. Rental income from the Thomastown property goes into its offset, while salary and personal savings go into the offset linked to the owner-occupied loan. That separation keeps the deductible debt quarantined and makes it much easier to show the ATO that interest claimed on the investment loan relates only to income-producing activity.
This structure also allows you to pay down the non-deductible debt faster while keeping the investment loan at interest-only, which is a common strategy for people working toward financial freedom through property while still carrying a mortgage on their own home.
Accessing Equity to Fund the Next Purchase
As your property increases in value or you pay down the loan balance, the equity in that property grows. Lenders will allow you to borrow against that equity to fund a deposit on your next investment, up to a combined LVR of usually 80 per cent across all properties to avoid LMI.
If the unit you bought near Edwardes Lake a few years ago has increased in value and you've built up $80,000 in usable equity, you can apply to release that equity as a separate loan or an increase to your existing facility. That borrowed amount then becomes the deposit for your next purchase. The interest on the equity release is deductible because the funds are being used to acquire an income-producing asset.
Keeping the equity loan separate from your original investment loan, either as a split or a standalone facility, makes it easier to track which portion of your borrowing relates to which property. It also means you can attach an offset to the new split and manage cash flow independently.
Serviceability and the Debt-to-Income Limit
Lenders assess your ability to repay an investment loan by calculating your income, existing debts, living expenses, and the rental income the property is expected to generate. Most lenders only count 70 to 80 per cent of the expected rent when assessing serviceability, to allow for vacancy periods and maintenance costs.
From February this year, lenders also apply a debt-to-income limit, which caps total borrowing at six times your gross annual income for no more than 20 per cent of new investor loans. If you're earning $90,000 a year, your maximum borrowing across all loans sits at $540,000 under that cap, though most borrowers will hit a serviceability limit before they reach the DTI ceiling.
The 3 percentage point serviceability buffer also applies. Even if the lender offers you a variable rate at 6 per cent, they assess your ability to repay at 9 per cent. That buffer protects you if rates rise, but it also reduces the amount you can borrow compared to what the advertised rate alone would suggest.
What You Can Claim and What You Can't
Interest on your investment loan is deductible against rental income, along with other holding costs like council rates, insurance, property management fees, and repairs. If your rental income is less than your total expenses, the loss can be offset against your other income such as salary under the current negative gearing rules for properties you already own.
From July next year, new residential investment properties purchased after May this year will be subject to quarantining, which means rental losses can only be offset against other residential rental income or carried forward. Properties you've already bought, or those you've contracted to buy before the cut-off date, continue under the old rules for as long as you hold them. That grandfathering applies even if you refinance, as long as you don't sell.
Offset accounts don't change your deduction. If you're paying interest on $450,000 but holding $20,000 in your offset, you still claim the full interest on $450,000, you just pay less of it because the offset has reduced the daily balance. The funds in the offset aren't taxable income, and withdrawing them doesn't trigger a tax event.
When It Makes Sense to Fix Part of the Loan
Some investors split their loan between variable and fixed portions to balance certainty with flexibility. You might fix half the loan for three years to lock in a known repayment, and leave the other half variable so you can still make extra repayments or access your offset without restriction.
That hybrid approach works well if you expect rates to rise but don't want to give up the ability to pay down debt or access redraw when cash flow allows. The variable portion keeps working with your offset account, while the fixed portion insulates you from rate increases on that part of the balance. Just be aware that each portion is a separate split, and you'll need to manage repayments and offsets accordingly.
Call one of our team or book an appointment at a time that works for you. We'll walk through your current situation, the rental market in Reservoir, and the loan structure that fits where you're headed, not just where you are now.
Frequently Asked Questions
How does an offset account reduce interest on an investment loan?
An offset account is a transaction account linked to your loan. Every dollar in the offset reduces the balance on which interest is calculated, without paying down the loan itself. The funds stay available for withdrawal at any time.
Can I still claim interest as a tax deduction if I use an offset account?
Yes. You claim the full interest expense on the loan balance, even if an offset account reduces the interest you actually pay. The offset lowers your out-of-pocket cost but doesn't change the deduction amount.
What is the difference between interest-only and principal-and-interest repayments?
Interest-only repayments cover only the interest charged each month, so the loan balance stays the same. Principal-and-interest repayments also pay down the loan balance, which increases your monthly cost but reduces the debt over time.
What happens to my variable rate when the Reserve Bank changes the cash rate?
Lenders usually adjust variable rates within a few weeks of a cash rate change, though they don't always pass on the full movement. Rate increases and decreases apply automatically without needing to refinance.
Can I use equity from one property to buy another investment property?
Yes. If your property has increased in value or you've paid down the loan, you can borrow against the equity up to a combined LVR of usually 80 per cent to avoid LMI. The interest on the equity release is generally deductible if the funds are used to buy an income-producing asset.
