Most first home buyers looking at investment property focus on securing the loan and finding the right property, but miss a crucial detail about how variable rate loans handle extra repayments.
If you're planning to buy an investment property, choosing a variable interest rate gives you the flexibility to make extra repayments without penalty. But whether you should make those extra repayments depends entirely on what you're trying to achieve with your investment.
Why Variable Rate Loans Work Differently for Investors
Variable rate investment loans let you pay more than the minimum repayment whenever you want. Unlike fixed rate loans, you won't face break costs or restrictions on extra payments. This sounds like a clear advantage, and for owner-occupiers, it usually is. For property investors, the calculation changes because of how tax deductions work.
When you make extra repayments on an investment loan, you reduce the loan balance faster. That means less interest charged, which also means smaller tax deductions. Consider someone who borrows $500,000 at a variable interest rate to purchase an investment property. If they make an extra $20,000 in repayments during the year, they'll save interest on that amount, but they'll also reduce their claimable expenses by the same interest they're no longer paying.
The Offset Account Alternative
Instead of making extra repayments directly onto your loan amount, putting spare cash into an offset account linked to your investment property loan achieves the same interest savings without reducing your loan balance. The offset balance reduces the interest charged on your investment borrowing, but the actual loan amount stays the same. This distinction matters because you maintain the full interest deduction for tax purposes while still reducing your interest costs.
Consider a buyer who purchases a $600,000 investment property with a 20% investor deposit and takes out a variable rate loan for the remaining $480,000. They earn rental income that covers most of the loan repayments, but they want to build wealth faster. Instead of throwing an extra $500 per month directly onto the loan, they deposit it into an offset account. The offset reduces their interest charges immediately, but when tax time arrives, they can still claim deductions based on the full $480,000 loan balance. If they ever need that cash for another deposit or investment opportunity, they can access it without having to refinance or redraw against the property.
When Extra Repayments Actually Make Sense
Direct extra repayments work better when you're planning to convert the investment property into your home later. If that's your property investment strategy, paying down the loan while it's still an investment maximises your tax deductions now. Once you move in, the loan becomes non-deductible, so having a lower loan amount at that point saves you money.
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Another scenario where extra repayments work is when you're approaching a loan to value ratio (LVR) threshold that affects your interest rate or Lenders Mortgage Insurance (LMI). Paying the loan down to 80% LVR, for instance, might qualify you for rate discounts or remove an LMI premium from future refinancing calculations.
What Investment Loan Features to Look For
Not all variable rate investment loan products include offset accounts, and some charge extra fees for the feature. When comparing investment loan options, check whether the offset is a standard inclusion or an add-on. Some lenders offer 100% offset accounts that reduce your interest dollar-for-dollar, while others offer partial offsets that only count a percentage of your balance.
Redraw facilities are common on variable rate loans, but they work differently from offset accounts. With redraw, you make extra repayments onto the loan and then apply to withdraw that money later if needed. The problem for investors is that pulling money out via redraw can complicate your tax position, especially if you use that money for personal expenses rather than investment purposes. The Australian Taxation Office looks at what you use borrowed funds for, not just what the original loan was for. Offset accounts keep your money separate, which keeps the tax treatment clearer.
How This Affects Your Next Property Purchase
When you're ready to expand your portfolio, lenders look at your rental income and existing loan commitments to calculate your borrowing capacity. If you've been making extra repayments directly onto your investment loan, your loan balance is lower, which helps your borrowing position. But if you've been using an offset account instead, you have both a lower effective interest cost and accessible savings for your next deposit. That combination often puts you in a stronger position for portfolio growth.
If you're starting as a first home buyer who's actually purchasing an investment property first, understanding these mechanics now saves you from restructuring later. Setting up your loan structure correctly from the start means you won't need an investment loan refinance down the line just to add features you should have had from day one.
Matching Your Loan Structure to Your Goals
Your loan structure should match what you're actually trying to do. If you want financial freedom through passive income and multiple properties, an offset account preserves your flexibility and keeps your tax deductions intact. If you're buying one investment property and planning to live in it within a few years, paying down the loan directly makes more sense.
Talk through your specific situation before you start your investment loan application. The difference between these approaches can mean thousands of dollars over the life of your loan, and the right choice depends on details like your income, your timeline, and whether you're planning to buy more property later. Call one of our team or book an appointment at a time that works for you to discuss which investment loan features actually suit your circumstances.
Frequently Asked Questions
Should I make extra repayments on my investment property loan?
It depends on your goals. Extra repayments reduce your loan balance and tax deductions, which isn't ideal if you're building a portfolio. Using an offset account instead gives you the same interest savings while preserving your deductions and keeping your cash accessible.
What's the difference between an offset account and making extra repayments?
Extra repayments reduce your loan balance permanently, lowering your interest charges and tax deductions. An offset account reduces your interest charges without changing your loan balance, so you keep the full tax deduction and can access your money anytime.
Can I make extra repayments on a variable rate investment loan without penalty?
Yes, variable rate loans let you make extra repayments without break costs or restrictions. However, whether you should make them depends on your tax position and investment strategy, not just whether the loan allows it.
Do all variable rate investment loans come with offset accounts?
No, offset accounts are a feature that some lenders include and others charge extra for. When comparing investment loan products, check whether the offset is standard or an add-on, and confirm it's a 100% offset rather than partial.
How do extra repayments affect my borrowing capacity for a second property?
Extra repayments reduce your loan balance, which can improve your borrowing capacity. However, money in an offset account gives you both lower effective debt and accessible savings for your next deposit, often creating a stronger position for portfolio expansion.
