Top Tips to Choose a Variable Rate Investment Loan

A variable rate investment loan moves with the lender's pricing, so your repayments can rise or fall over time. For a Hawthorn investor, the key decision is whether that flexibility suits your cash flow and your plans for the property.

This article covers how a variable rate works, how interest-only and principal and interest repayments compare, and what lenders look at when they assess your application.

What Is a Variable Rate Investment Loan?

A variable rate investment loan is a loan for a rental property where the interest rate can change over the life of the loan. Your lender decides when to adjust the rate, and the repayment changes with it.

The RBA cash rate is currently 4.85% p.a. It is one of the factors that can influence lender pricing, but lenders set their own investor rates, and pricing can differ between lenders and loan structures. A broker can compare investment loan options from banks and lenders across Australia so you can see how pricing and features differ.

The main trade-off is certainty. If rates rise, your repayments rise too, so you need a buffer in your budget.

How Do Interest-Only and Principal and Interest Repayments Compare?

With interest-only repayments you pay only the interest for a set period, while principal and interest repayments reduce the loan balance as well. Interest-only keeps early repayments lower, but the balance does not fall during that period.

Consider an investor with a $600,000 loan at an illustrative rate of 6.75% p.a. over 30 years. This is an example only, not a current rate or a quote.

• Interest-only: about $3,375 a month ($600,000 x 6.75% / 12).
• Principal and interest over 30 years: about $3,891 a month.

Suppose the investor chooses a 5-year interest-only period. After that, repayments switch to principal and interest over the remaining 25 years. At the same 6.75% rate, that repayment is about $4,145 a month, higher than the 30-year figure because the same balance is repaid over a shorter time.

The outcome is a lower repayment for five years, followed by a higher one. An investor choosing this path should plan for the step up. You can test your own numbers with the loan repayment calculator.

An interest-only feature does not increase how much you can borrow. APRA expects lenders that are authorised deposit-taking institutions to assess interest-only loans on principal and interest repayments over the remaining term, which gives a lower maximum loan size than an equivalent principal and interest loan.

How Do Lenders Assess Investor Borrowing?

Lenders test whether you can afford the loan at a rate well above the one you will pay. APRA requires banks, credit unions and building societies to assess new borrowers at a rate at least 3.0 percentage points above the loan rate.

This buffer applies to authorised deposit-taking institutions only. Non-bank lenders are not subject to it, so their assessments can differ.

Rental income also counts, but only partly. APRA's view is that prudent policies count no more than 80 per cent of expected rent, to allow for periods without a tenant. Lenders usually place less weight on a rental appraisal than on actual rent received. Which evidence they accept varies by lender.

APRA also limits how much new lending a bank can write at a debt-to-income ratio of six times or greater. It is a measure on each bank's overall lending, not a cap on you personally, but an investor with large existing debts may find some lenders more cautious. Use the borrowing power calculator for a starting estimate.

Why Add an Offset Account to a Variable Rate Loan?

An offset account reduces the balance on which interest is charged, so the interest on your loan is lower. Your loan balance stays the same, but you pay interest only on the loan less the offset balance.

For tax, lower interest incurred means a lower interest deduction, because you can only claim interest you actually incurred. That is not a reason to avoid an offset, as you are still better off with less interest paid overall than with a larger deduction, but speak with your accountant about how it affects your return.

An offset balance does not reduce the loan amount for lender risk calculations, including loan-to-value ratio. Whether an offset is full or partial, and what it costs, depends on the lender and product.

Is Interest on an Investment Loan Tax Deductible?

Interest on money borrowed to buy or hold a rental property is generally deductible, to the extent the property is rented or available for rent. Only the interest part of a principal and interest repayment is deductible. The principal part is not.

How you use the money matters. Under ATO Taxation Ruling TR 2000/2, deductibility depends on what the borrowed funds are used for. If you redraw cash from the loan for a private purpose, interest on that portion is not deductible, which can complicate your records.

Negative gearing rules have also changed. Losses on residential properties held at 7:30pm AEST on 12 May 2026 can continue to be deducted against other income, as can losses on eligible new builds. For established residential properties acquired after that time, losses can only be offset against residential property income from the 2027-28 income year. Properties acquired between 12 May 2026 and 30 June 2027 may be negatively geared under the current rules until 30 June 2027 only.

These rules are detailed, so confirm how they apply to you with your accountant before you buy.

Using Equity From Your Home to Fund a Deposit

If you own a home in Hawthorn, you may be able to borrow against its equity to fund an investment purchase. Lenders generally require extra approval to lend above 80 per cent loan-to-value ratio, and Lenders Mortgage Insurance (LMI) is generally required above that level. The cost of LMI is paid by the borrower.

Consider an owner who borrows against their home for the deposit on a rental property. The interest on that equity loan is deductible only if the funds are used for the investment purchase, not simply because the home is the security. The interest is deductible to the extent the borrowed funds are used for the investment purchase. Keeping the investment funds in a separate loan split can make it easier to show this and to apportion interest at tax time. Confirm the treatment with your accountant. The trade-off is that you now carry debt against both properties.

See equity release loans for how this works, and the stamp duty calculator to estimate upfront costs.

Should You Refinance an Existing Investment Loan?

Refinancing can make sense when your current loan no longer suits your needs, but it has costs. Discharge fees, valuation fees and new application costs vary by lender, so weigh them against any benefit.

A review is worth doing if your rate has drifted from what new customers are offered, or if you want to change the loan structure. Our refinancing page explains the process.

Talk to a Hawthorn Mortgage Broker About Your Investment Loan

Call one of our team or book an appointment at a time that works for you. Blue Lion Lending can compare lenders, run the numbers on a variable rate structure and explain how it fits your goals. Visit our Hawthorn home loans page or book an appointment today.

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