Top tips to use variable rate loans and extra repayments

Variable rate investment loans allow borrowers to make unlimited additional repayments without penalty, a feature that can materially alter the life of the loan and the interest paid over time.

The capacity to reduce principal ahead of schedule, while preserving access to those funds through a redraw facility or offset account, provides a level of control that fixed rate products do not offer. For property investors holding multiple assets or building a portfolio, that flexibility becomes more valuable as circumstances change.

Why variable rates suit active investors

A variable rate responds to movements in the official cash rate, which means the interest charged adjusts throughout the life of the loan. Lenders typically apply rate changes within days of a Reserve Bank announcement, and those changes flow directly to the repayment amount or the interest accrued.

Investors who make extra repayments on a variable loan reduce the outstanding principal, which lowers the amount of interest charged in subsequent periods. The compounding effect over time can reduce both the loan term and the total cost of the loan, without locking capital into a product that penalises early repayment. Access to redraw or an offset arrangement means funds remain available if needed for another deposit, property maintenance, or a vacancy period.

Consider an investor holding a rental property in Footscray who receives a rental income stream and directs surplus income into the loan each quarter. Over several years, those additional payments reduce the principal faster than scheduled repayments alone. If a second investment opportunity arises, the redraw facility allows the investor to access those funds without refinancing or applying for a separate loan.

Offset accounts and how they work with variable loans

An offset account is a transaction account linked to the investment loan. The balance in the offset account reduces the principal on which interest is calculated, without those funds being applied directly to the loan.

If the loan balance is $400,000 and the offset account holds $30,000, interest is charged on $370,000. The full loan balance remains, which preserves the deductibility of interest for taxation purposes. This structure is particularly useful for investors who need to maintain liquidity while minimising interest costs.

Offset arrangements are typically available only on variable rate products. Fixed rate loans rarely offer offset functionality, and where they do, the offset benefit is often partial rather than full. For investors managing multiple properties or holding funds for future acquisitions, an offset account provides a way to reduce interest expense without committing capital permanently.

Making extra repayments without losing deductibility

Interest on borrowings used to acquire or hold a rental property is deductible against assessable income, provided the property is rented or genuinely available for rent. When an investor makes extra repayments on an investment loan, the outstanding principal is reduced, which lowers the amount of deductible interest in future periods.

Redrawing those funds for private purposes, such as a holiday or personal vehicle, converts that portion of the loan to private use. Interest on the redrawn amount is no longer deductible. Redrawing funds to acquire another investment property, pay for deductible repairs, or cover holding costs on the existing property preserves the deductibility of interest on the redrawn amount.

Investors who anticipate needing access to capital should consider whether an offset account or a separate loan structure better suits their circumstances. An offset account allows funds to reduce interest without being applied to the loan, which avoids the redraw and re-characterisation issue entirely.

Structuring repayments around rental income and cash flow

Rental income from an investment property can be directed into an offset account or applied as additional repayments, depending on the investor's cash flow needs and portfolio strategy. Directing rental income into an offset account reduces interest costs while keeping funds accessible for property expenses, such as repairs, body corporate fees, or periods of vacancy.

Applying rental income directly as extra repayments reduces the loan balance permanently, which shortens the loan term and reduces total interest. However, once applied, those funds are only accessible through redraw, which may involve conditions or delays depending on the lender.

In our experience, investors with stable employment income and predictable cash flow are more likely to make structured extra repayments, while those building a portfolio or holding properties in precincts with higher vacancy rates prefer the liquidity of an offset arrangement. The choice depends on whether the investor prioritises debt reduction or cash flow flexibility.

Rate discounts and how they apply to variable products

Lenders offer variable rate investment loans at a margin above their standard variable rate, with discounts applied based on the loan amount, the loan-to-value ratio, and the borrower's financial position. A larger loan amount or a lower LVR typically attracts a higher discount, which reduces the interest rate charged.

Discounts are not static. Lenders periodically adjust the standard variable rate in response to funding costs, regulatory capital requirements, and competitive positioning. The discount itself may also change during the life of the loan, particularly if the borrower refinances or negotiates with the lender.

Investors who refinance to access a better rate or who consolidate multiple loans with a single lender may negotiate a higher discount. The benefit of refinancing depends on the difference between the current rate and the new rate, the costs associated with refinancing, and whether the investor intends to make additional repayments or access equity in the near term.

Variable rate loans and portfolio growth

Investors building a portfolio often use equity in an existing property to fund the deposit on a subsequent acquisition. A variable rate loan allows the investor to reduce the principal through extra repayments, which increases the available equity over time without refinancing.

When the investor is ready to acquire another property, the equity can be accessed through a top-up or a separate line of credit, depending on the lender's structure and the investor's borrowing capacity. Lenders assess borrowing capacity using a serviceability buffer, rental income from existing properties, and the investor's other financial commitments.

Under APRA's framework, lenders apply a serviceability buffer of at least 3.0 percentage points above the loan product rate, and from February 2026, a debt-to-income limit applies to new lending. Up to 20 per cent of new investor loans may be made to borrowers with a total debt-to-income ratio of six times or greater, measured quarterly across each lender's portfolio. Investors approaching that threshold may find their borrowing capacity constrained unless they reduce existing debt or increase income.

Consider an investor who holds two rental properties and has been directing surplus income into one loan for three years. The principal on that loan has reduced substantially, and the investor now has sufficient equity to fund a deposit on a third property without selling an existing asset. The variable rate structure and the capacity to make extra repayments allowed the investor to build equity faster than the scheduled loan term would permit.

When a split loan structure may be appropriate

Some investors use a split loan structure, with part of the borrowing on a fixed rate and part on a variable rate. The fixed portion provides certainty over repayments for a defined period, while the variable portion allows extra repayments and retains access to offset or redraw.

A split structure may suit investors who want to lock in a portion of their borrowing costs while retaining flexibility on the remainder. The proportion allocated to each rate type depends on the investor's risk tolerance, cash flow position, and view on future rate movements. Lenders typically allow splits in any proportion, and the fixed and variable portions are managed as separate loan accounts with separate terms.

Investors considering a split should be aware that the fixed portion will usually incur break costs if repaid early or refinanced before the fixed term ends. The variable portion does not attract those costs and can be repaid in full at any time.

Call one of our team or book an appointment at a time that works for you

Lexor Finance works with property investors across Victoria and throughout Australia to structure investment loans that suit individual circumstances and portfolio objectives. Whether you are acquiring your first rental property or building a portfolio across multiple locations, we can assess your borrowing capacity, compare loan products from lenders across the market, and help you understand how variable rate features and repayment options align with your long-term strategy. Call our team or book an appointment at a time that works for you.

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