The Pros and Cons of Variable Rate Investment Loans

Variable rate investment loans offer flexibility that fixed products cannot match, but the ongoing costs can vary significantly between lenders.

When financing a rental property, most Queensland investors focus on the interest rate and overlook the fee structure that can add thousands to the annual cost of holding the property. A variable rate loan typically includes an establishment fee, ongoing monthly account fees, and potential exit costs if you refinance or sell. Some lenders also charge for additional features like offset accounts or redraw facilities, while others bundle these into the product at no extra cost. Understanding which fees apply to your loan, and whether they are tax deductible, changes the true cost of the borrowing.

Application and Establishment Fees on Variable Investment Loans

Most lenders charge an upfront application or establishment fee when you take out a variable rate investment loan, typically ranging from $300 to $1,000. This fee covers the administrative cost of processing your application and setting up the loan. Some lenders waive this fee during promotional periods or for refinancing clients, while others structure it as a percentage of the loan amount. The fee is generally tax deductible in the year it is paid, as it relates directly to the cost of securing finance for an income-producing asset. If you are refinancing an existing investment loan to access a lower rate or release equity for further purchases, the establishment fee on the new loan is also deductible.

Consider an investor refinancing a Logan rental property with a loan amount of $450,000. The new lender charges a $600 establishment fee and a $295 valuation fee. Both amounts can be claimed as deductions in the financial year the refinance settles, reducing the net cost of the switch. If the refinance also delivers a rate reduction of 0.30%, the monthly saving in interest more than offsets the upfront cost within the first few months.

Ongoing Monthly Account Fees and Annual Charges

Variable rate investment loans often include a monthly account keeping fee, usually between $10 and $20 per month, which adds $120 to $240 to your annual costs. Some lenders also charge an annual package fee if the loan is part of a bundled product that includes features like offset accounts, fee waivers on transaction accounts, or discounted credit cards. These package fees typically range from $300 to $400 per year. While these ongoing fees are fully tax deductible as they relate to the management and maintenance of the loan, they reduce the cash flow available from rental income and should be factored into your property investment strategy.

If you hold multiple investment properties, some lenders allow you to link loans under a single package fee rather than paying separate account fees on each property. This can reduce the total cost if you are building a portfolio. Before choosing a loan based on the advertised interest rate alone, calculate the total annual fee burden and compare it against the interest saving. A loan with a slightly higher rate but no ongoing fees may deliver lower overall costs, particularly if the loan amount is relatively small.

Offset Accounts and Redraw Facility Costs

An offset account linked to your variable investment loan can reduce the interest charged by offsetting the balance in the account against the loan principal. Not all lenders offer offset accounts on investment loans, and some charge a monthly fee of $10 to $15 to maintain the facility. If your lender charges for the offset account, that fee is tax deductible as it relates directly to reducing interest on the investment loan. A redraw facility, which allows you to access any extra repayments you have made, is more common on variable rate products and usually comes at no additional cost. Some lenders do charge a redraw fee, typically $20 to $50 per transaction, which is not tax deductible as it relates to accessing your own funds rather than the cost of the loan itself.

In our experience, investors often assume that offset accounts are only useful for owner-occupied loans, but they can be valuable for property investors who hold surplus cash between purchases or renovations. If you plan to accumulate funds for a deposit on your next investment property, parking that money in an offset account linked to your existing investment loan reduces the interest expense on the first property while keeping the funds accessible. The key is ensuring the offset account fee does not exceed the interest saving it generates.

Valuation and Settlement Fees

When you apply for a variable rate investment loan, the lender will typically require a valuation of the property to confirm its market value and assess the loan to value ratio. Valuation fees range from $200 to $400 depending on the property type and location. Some lenders absorb this cost for high-value loans or refinancing clients, while others pass it directly to the borrower. Settlement fees, also known as loan documentation or discharge fees, apply when the loan is formally registered or when you pay out the loan early. These fees are usually between $150 and $350 and are tax deductible as they relate to the cost of securing or discharging finance for the investment property.

If you are buying an investment property in a regional Queensland area like Toowoomba or Cairns, some lenders may charge a higher valuation fee due to the distance or the need for a specialised valuer. When comparing loan options, ask for a breakdown of all upfront costs so you can assess the true cost of each product.

Exit Fees and Refinancing Costs

Variable rate investment loans generally do not include exit fees or break costs, which is one of the main advantages over fixed rate products. You can repay the loan in full, sell the property, or refinance to another lender at any time without penalty. However, some lenders charge a discharge fee to cover the administrative cost of removing the mortgage from the property title, typically between $150 and $350. This fee is tax deductible as it relates to the original loan used to finance the investment property, even though it is paid at the time of discharge.

If you are considering refinancing to release equity for another purchase or to access a lower rate, the absence of exit fees on a variable loan means you can act quickly when market conditions change. In contrast, breaking a fixed rate loan early can result in break costs of several thousand dollars, depending on the movement in interest rates since the loan was fixed. This flexibility is particularly valuable for investors who plan to grow their portfolio over time and need the ability to restructure their borrowing as opportunities arise.

Lenders Mortgage Insurance and Its Impact on Costs

If your deposit is less than 20% of the property value, the lender will require you to pay Lenders Mortgage Insurance, which protects the lender if you default on the loan. LMI is calculated as a percentage of the loan amount and increases as the loan to value ratio rises. For an investment loan with a 10% deposit, LMI can add $10,000 to $30,000 to the upfront cost, depending on the purchase price and lender. LMI is a one-off cost that can be capitalised into the loan amount, meaning you do not need to pay it upfront in cash, but it does increase the total amount borrowed and the interest paid over the life of the loan.

LMI is tax deductible for investment loans, but the deduction must be spread over five years or the term of the loan, whichever is shorter. This differs from other loan fees, which are generally deductible in full in the year they are incurred. If you sell the property or refinance within five years, you can claim the remaining portion of the LMI premium in the year of sale or discharge. Given the size of the LMI premium at higher loan to value ratios, it is worth calculating whether saving a larger deposit or using equity from another property to avoid LMI delivers a lower overall cost.

Comparing Total Costs Across Lenders

The total cost of a variable rate investment loan includes the interest rate, all ongoing fees, and any upfront charges such as establishment fees and LMI. A loan with a slightly higher rate but lower fees may deliver lower total costs than a loan with a lower rate and high ongoing charges, particularly if you hold the loan for several years. When comparing loan options, calculate the total cost over the expected holding period rather than focusing solely on the rate. Some lenders offer discounted rates for the first year or two, then revert to a higher standard rate, which can erode any initial saving.

If you hold multiple investment properties, ask whether the lender offers portfolio discounts or fee waivers for consolidating your loans. Some lenders reduce the interest rate or waive account fees if your total borrowing exceeds a certain threshold, which can deliver significant savings as your portfolio grows. A loan health check every year or two ensures you are not paying more than necessary and identifies opportunities to refinance or restructure as your circumstances change.

Interest Only Versus Principal and Interest Repayments

Most variable rate investment loans offer the option to make interest only repayments for a set period, usually one to five years, before reverting to principal and interest repayments. Interest only repayments reduce the monthly cash outflow, which can improve cash flow if the rental income does not fully cover the loan repayments and other holding costs. However, the loan balance does not reduce during the interest only period, so you do not build equity through repayments. Some lenders charge a higher interest rate for interest only loans, typically 0.10% to 0.30% above the principal and interest rate, which adds to the total cost.

For investors focused on building wealth through capital growth and maximising tax deductions, interest only repayments allow you to direct surplus cash toward additional property purchases or other investments rather than paying down debt on an appreciating asset. For investors approaching retirement or those who want to reduce debt over time, principal and interest repayments are more appropriate. The choice depends on your overall property investment strategy and your capacity to service the loan when it reverts to principal and interest repayments.

Tax Deductibility of Investment Loan Fees and Costs

All costs directly related to obtaining or maintaining an investment loan are generally tax deductible, including establishment fees, ongoing account fees, valuation fees, discharge fees, and LMI. The interest paid on the loan is also fully deductible, as it is an expense incurred in earning rental income. Costs that are not directly related to the loan, such as conveyancing fees, stamp duty, or building and pest inspections, are not deductible against rental income but may form part of the cost base for capital gains tax purposes when you sell the property.

If you use a redraw facility to withdraw funds for personal purposes, the interest on that portion of the loan is not deductible, as it no longer relates to the investment property. Keeping loan accounts separate for investment and personal borrowing ensures you can clearly identify which interest expenses are claimable. If you are unsure whether a particular fee or cost is deductible, speak to an accountant or tax adviser who specialises in property investment.

Call one of our team or book an appointment at a time that works for you to discuss which variable rate investment loan structure suits your goals and how to structure your borrowing to maximise tax deductions and cash flow.

Frequently Asked Questions