When to Use Variable Rates for Investment Loans

A variable rate investment loan with extra repayment access gives you control over debt without locking away capital you might need later.

Variable Rate Investment Loans and Redraw Access

A variable rate investment loan allows you to make additional repayments beyond the minimum required amount and withdraw those funds later through a redraw facility. The interest rate moves with changes in official cash rates and lender pricing, which means your repayment amount can change during the life of the loan. Most variable rate products offered by banks and lenders across Australia include a redraw facility at no additional cost, though some lenders apply fees or restrictions on the number of redraws permitted each year.

Redraw access matters when you hold income-producing assets alongside debt. Consider an investor who purchases a two-bedroom unit near the Newport Lakes Reserve with a loan amount of $650,000 on a variable interest rate. If rental income exceeds expectations or a tax refund arrives, those funds can be deposited into the loan to reduce interest costs. When a repair bill or body corporate special levy arises six months later, the investor can redraw those funds without applying for a new loan or relying on credit cards at higher rates.

When Extra Repayments Affect Tax Deductibility

Interest on borrowings used to acquire or hold residential rental property remains deductible to the extent the property is rented or held to produce assessable income. Extra repayments reduce the outstanding loan balance and therefore reduce the amount of deductible interest you pay. Redrawing those funds for private purposes, such as a holiday or car purchase, creates a non-deductible portion of the loan. The Australian Taxation Office treats the redrawn amount as a separate borrowing for the private purpose, which means interest on that portion is not claimable against rental income.

Keeping borrowed funds separated by purpose is the only reliable way to preserve deductions. If you redraw $20,000 from an investment loan to renovate your own home, the interest on that $20,000 is no longer deductible. If you redraw the same amount to replace a hot water system in the rental property, the interest remains deductible. The loan security does not determine deductibility. The use of the borrowed funds determines it.

Interest Only Compared to Principal and Interest with Redraw

An interest-only investment loan keeps your regular repayment amount lower by deferring principal repayments for a set period, usually between one and five years. A principal and interest loan with redraw lets you reduce the loan balance voluntarily while maintaining access to those funds if circumstances change. Both structures can suit property investors, depending on cash flow needs and risk tolerance.

In our experience, investors who expect irregular income or plan to use equity for further property purchases often prefer the flexibility of principal and interest with redraw over a strict interest-only arrangement. A principal and interest loan on a Newport investment property with a variable interest rate allows the investor to reduce debt during periods of strong rental income, then access those funds to cover vacancy periods or contribute toward a deposit on a second property without refinancing. Interest-only loans do not offer this option. Once the interest-only period ends, the loan reverts to principal and interest at a higher repayment amount, and no redraw buffer exists unless you have been making voluntary payments into an offset account.

Under the prudential framework, investment loans and interest-only loans generally attract higher risk weights than owner-occupied principal and interest loans at the same loan to value ratio. This flows through to investor interest rates, which are typically priced higher than owner-occupier rates. A long-term interest-only residential loan is classified as non-standard where the LVR is greater than 80 per cent and the contractual interest-only period is greater than five years or is not specified, which can result in higher capital costs for the lender and higher rates for the borrower.

Using Equity and Redraw Together

Property investors in Newport regularly see capital growth in suburbs close to the city with access to transport and lifestyle amenities. When the value of an investment property increases, the equity in that property can be accessed through refinancing or a top-up loan. A redraw facility on your existing variable rate loan does not create new borrowing capacity based on increased property value. It only gives you access to funds you have already repaid.

If you want to leverage equity for a second investment property, you need to apply for additional borrowing, either by refinancing the existing loan or establishing a separate loan secured against the same property. A loan health check before applying helps clarify how much equity you can access and whether your current loan structure supports portfolio growth without unnecessary refinancing costs.

Redraw Restrictions During Hardship or Refinancing

Lenders can suspend or restrict redraw access in certain circumstances, including when a borrower enters financial hardship arrangements or when the loan is in arrears. Under section 72 of the National Credit Code, a borrower under a regulated credit contract may give the credit provider notice of their inability to meet obligations under the contract. The credit provider has defined timeframes to respond and may agree to change the contract terms, which can include temporary suspension of redraw access to prevent further drawdown during a hardship period.

Some lenders also restrict redraw access when a borrower applies to refinance the loan to another lender. This is not universal, but it occurs often enough that investors should not assume redraw will be available during the settlement period of a refinance. If you plan to use redrawn funds to cover settlement costs or a deposit for another property, confirm with your current lender that redraw remains available throughout the refinancing process.

Offset Accounts as an Alternative to Redraw

An offset account is a transaction account linked to your investment loan. The balance in the offset account reduces the interest charged on the loan without reducing the loan balance itself. Offset account balances do not reduce the loan amount for LVR purposes under APS 112, which means the loan amount and the deductible interest calculation remain unchanged regardless of how much you hold in offset.

For tax purposes, an offset account provides a clearer separation between rental income savings and private funds. You can deposit rental income, tax refunds and other investment-related cash into the offset account to reduce interest costs, then withdraw those funds for private purposes without affecting the deductibility of interest on the loan. The loan balance stays constant, so the entire interest charge remains deductible as long as the loan was used to acquire or hold the rental property. Redraw, by contrast, reduces the loan balance and creates a non-deductible portion if the redrawn funds are used privately.

Not all variable rate investment loan products include an offset account. Some lenders charge an annual fee for offset access, while others include it only on premium loan products with slightly higher interest rates. The cost of accessing an offset facility should be weighed against the value of maintaining full deductibility and separating funds by purpose.

Call one of our team or book an appointment at a time that works for you to discuss how variable rate loan features apply to your investment property finance and whether an offset or redraw structure suits your situation.

Frequently Asked Questions