Beginner's Guide to Variable Investment Loan Fees and Costs

A variable rate investment loan carries costs beyond the interest rate, and each cost should be assessed before a commitment is made.

This article is intended for ACT investors who are comparing loan structures. It sets out the principal cost categories, a worked repayment example and the tax considerations that interact with borrowing costs. It is general information only and does not constitute personal financial, credit or tax advice.

What Fees and Costs Apply to a Variable Rate Investment Loan?

A variable rate investment loan generally involves the interest charged on the balance, together with lender fees that differ between institutions and products. The amount and type of each fee is stated in the lender's credit guide, loan contract and product terms, and should be reviewed before acceptance.

Fees commonly encountered include application or establishment charges, property valuation fees, ongoing account or package fees, and discharge fees when a loan is closed. Each lender sets these independently, so a lower interest rate may be offset by higher ongoing charges. The comparison should be made across the whole cost of the facility, not the rate alone.

The interest rate on a variable loan may move during the loan term. This is the principal trade-off of the structure: repayments may fall, but they may also rise. Investors should hold a buffer for that possibility. Where a rate discount is offered, its size and conditions depend on the lender and the loan size, and should be confirmed in writing. Our investment loans page outlines the product categories available through our panel.

How Interest-Only and Principal and Interest Repayments Compare at 6.75%

At an illustrative rate of 6.75% p.a., an interest-only repayment is lower than a principal and interest repayment in the early years, but the later repayment is higher once principal is required. The rate used here is illustrative only and is not a current market rate.

Consider an investor who proposes an illustrative loan of $500,000 over 30 years. The investor is weighing a five-year interest-only period against principal and interest from the outset.

• Interest-only for the first five years: approximately $2,813 per month, being $500,000 multiplied by 6.75% and divided by 12.
• Principal and interest over 30 years: approximately $3,243 per month.
• Principal and interest after the interest-only period, over the remaining 25 years: approximately $3,455 per month.

The outcome is that the investor saves roughly $430 per month during the interest-only period. However, the balance remains at $500,000 at the end of that period, and the later repayment is about $212 per month higher than the 30-year principal and interest figure. The repayment rises because the same balance must be repaid over a shorter term. The figures assume the rate remains constant, which a variable rate may not do. A repayment calculator can be used to test other loan amounts and rates.

Lenders also assess interest-only loans on the principal and interest repayment over the remaining term after the interest-only period. An interest-only feature therefore does not increase borrowing capacity. Our borrowing capacity page describes how serviceability is assessed.

Lenders Mortgage Insurance and the 80 Per Cent LVR Threshold

Lenders mortgage insurance is generally required where the loan to value ratio exceeds 80 per cent. It is a cost payable by the borrower, and it protects the lender, not the borrower.

The 80 per cent figure is a threshold at which insurance is generally required. It is not a legal limit on borrowing. Lending above that level requires approval from both the lender and the insurer, and each applies its own criteria. The premium is calculated on a sliding scale according to the loan amount and the LVR. Whether the premium may be added to the loan depends on the lender and insurer.

The principal trade-off is that a smaller investor deposit increases the amount borrowed and may add an insurance premium. Both increase the total cost of the facility. Offset account balances do not reduce the loan amount when the LVR is calculated for prudential purposes.

Which Variable Rate Loan Costs Are Tax Deductible?

Interest on money borrowed to acquire or hold a rental property is deductible to the extent the property is rented or held to produce assessable income. The principal component of a repayment is not deductible, as it is a repayment of capital.

This applies to both interest-only and principal and interest structures, and only the interest portion is deductible under either. Other holding costs, including council rates, insurance, property management fees and repairs, are deductible under existing ATO rules for the period the property is rented or genuinely available for rent. Interest on funds borrowed for private purposes is not deductible, regardless of the security provided.

The treatment of net rental losses has changed. Losses on residential properties held at 7:30pm AEST on 12 May 2026 continue to be deductible against other income until the property is sold. From the 2027-28 income year, net rental losses on established residential properties acquired after that time are deductible only against other residential property income. Eligible new builds retain the broader treatment. These rules are complex and are not a guarantee of any tax outcome. Please obtain advice from your accountant, and see our tax savings page for further information.

Offset and Redraw Facilities: Effects on Interest and Deductibility

An offset account reduces the balance on which interest is charged, while a redraw facility allows previously repaid funds to be withdrawn. They affect the cost of the loan in different ways, and the tax treatment differs.

With an offset, interest is charged on the loan balance less the offset balance. The interest incurred is therefore lower, and so is the amount available as a deduction. The loan balance itself is unchanged. Offset and redraw features may carry an additional fee or a higher rate, depending on the lender.

Under ATO Taxation Ruling TR 2000/2, a redraw is treated as a separate borrowing, and its deductibility depends on how the funds are used. A redraw applied to a private purpose is not deductible, which may reduce the deductible portion of the loan. Investors should obtain advice from their accountant before using redraw funds for non-investment purposes.

Existing borrowers may also review their current facility through a loan health check or consider refinancing, noting that discharge, valuation and establishment charges may apply.

To discuss the fees and costs of a variable rate investment loan, call one of our team or book an appointment at a time that works for you.

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