What Are Variable Rate Investment Loans?
When you're buying an investment property, choosing between variable and fixed interest rates is one of your biggest decisions. A variable rate investment loan means your interest rate can move up or down based on market conditions and what your lender decides to do with their rates.
For PAYG employees looking to build wealth through property, variable rate loans offer flexibility that can work in your favour. When official cash rates drop, your variable interest rate typically follows, which means lower repayments and potentially more passive income from your rental property loan.
The Core Fees You'll Encounter
Before you dive into your property investment strategy, let's talk about what a variable rate investment loan will actually cost you beyond the interest rate.
Application and Establishment Fees
Most lenders charge between $300 and $1,000 to process your investment loan application and set up your loan. This covers the administrative work, credit checks, and valuation of your investment property. Some lenders waive these fees as part of promotional offers, so it's worth asking your mortgage broker about current deals when you access investment loan options from banks and lenders across Australia.
Ongoing Monthly Account Fees
Many investment loan products charge an ongoing account keeping fee, usually between $10 and $15 per month. Over the life of your loan, this adds up to thousands of dollars, so factor this into your calculations when comparing investment property rates.
Lenders Mortgage Insurance (LMI)
If your investor deposit is less than 20% of the property value (meaning your loan to value ratio or LVR is above 80%), you'll need to pay Lenders Mortgage Insurance. This protects the lender if you can't make repayments, and it can cost anywhere from a few thousand dollars to tens of thousands depending on your loan amount and LVR.
The higher your LVR, the higher your LMI premium. For example, with a 10% investor deposit on a $600,000 property investment loan, you might pay around $20,000 in LMI. This is typically added to your loan amount rather than paid upfront, but it does increase your overall borrowing.
Ready to get started?
Book a chat with a Finance & Mortgage Broker at Allscope Financial Services today.
Variable Rate Investment Loan Features and Their Costs
One advantage of variable rate loans is access to additional investment loan features that can help with portfolio growth and financial freedom. However, some features come with their own costs.
Offset Accounts
An offset account linked to your investment property loan can reduce the interest you pay. The balance in your offset account is subtracted from your loan amount before interest is calculated. Some lenders include this feature at no cost, while others charge $10-$20 per month. Despite the fee, the interest savings often outweigh the cost, especially if you maintain a decent balance.
Redraw Facilities
A redraw facility lets you access any extra repayments you've made on your principal and interest loan. This can be useful for leveraging equity or covering unexpected costs like body corporate fees or repairs during a high vacancy rate period. Most lenders offer redraw facilities with variable rate loans, though some charge $20-$50 per withdrawal.
Interest Only Investment Options
Many property investors choose interest only investment loans to maximise tax deductions and improve cash flow. With interest only, you're not paying down the principal for a set period (usually 1-5 years), which means lower repayments. This strategy works well when you need rental income to cover most of your costs while claiming the interest as one of your claimable expenses.
Interest only periods are commonly available on variable rate loans at no extra fee, though your interest rate might be slightly higher than principal and interest rates.
Understanding Rate Discounts and How They Work
The advertised variable interest rate isn't always what you'll pay. Lenders typically offer rate discounts based on several factors:
- Your loan amount (larger loans often receive bigger investor interest rate discounts)
- Your LVR (lower ratios can mean better rates)
- Whether you're a PAYG employee with stable income
- Your overall relationship with the lender
These interest rate discounts can range from 0.5% to 1.5% off the standard variable rate, which makes a significant difference to your investment loan repayments over time.
Hidden Costs to Watch For
Beyond the obvious fees, there are some costs that catch property investors off guard.
Valuation Fees
When applying for your investment loan or looking to refinance down the track, lenders need to know what your property is worth. Valuation fees typically range from $200 to $600, and you'll pay this whether your application is approved or not.
Settlement Fees
When your investment loan settles, you might face additional legal and administrative charges from your lender, usually between $150 and $500.
Discharge Fees
If you decide to refinance your investment loan or sell your property, most lenders charge a discharge fee to close the loan account. This typically costs between $200 and $400.
Comparing the True Cost of Investment Loan Products
When calculating investment loan repayments, don't just look at the interest rate. A loan with a slightly higher variable interest rate but lower ongoing fees might cost you less over time than a loan with a lower rate but expensive features.
Consider these factors when reviewing different investment loan options:
- Total fees over the first five years
- Whether investment loan features like offset accounts provide real value for your situation
- The flexibility to switch between interest only and principal and interest
- Potential rate discounts you qualify for
- Your ability to make extra repayments without penalty
Tax Benefits and Claimable Expenses
The good news is that most fees associated with your investment property finance are tax deductible. Your loan interest, application fees, ongoing account fees, and many other costs can be claimed to maximise tax deductions each financial year. This is one of the negative gearing benefits that helps property investors build wealth over time.
Stamp duty on the property purchase, body corporate fees, property management costs, and even the interest portion of your repayments are all claimable expenses that reduce your taxable income.
Making Variable Rates Work for Your Investment Strategy
Variable rate loans suit PAYG employees who want flexibility in their investor borrowing. Unlike fixed rate loans, you can usually make unlimited extra repayments, access redraw facilities, and benefit when interest rates fall.
This flexibility is valuable when your circumstances change - perhaps your rental income increases, you receive a work bonus, or you want to equity release from your existing property to fund another purchase for portfolio growth.
For those building wealth through property investment, understanding every fee and cost involved in your investment loan helps you make informed decisions about your property investment strategy. The right loan structure can mean the difference between struggling with cash flow and generating genuine passive income.
At Allscope Financial Services, we work with PAYG employees to find investment loan products that match your financial goals and circumstances. We'll help you understand exactly what you're paying for and identify which investment loan benefits actually matter for your situation.
Call one of our team or book an appointment at a time that works for you to discuss your investment loan options.