Variable Rate Investment Loans & How to Approach Them

A Variable Rate Gives You Room to Move

A variable rate investment loan adjusts when the lender changes its rates, which means your repayments can go up or down. For separating couples who need flexibility while rebuilding financially, the ability to make extra repayments, redraw funds, or refinance without penalty can matter more than locking in a fixed rate.

Consider someone who has just settled a property split and is keeping an investment property as part of the agreement. They might have some cash from the settlement that they want to park against the loan while they figure out their next move. A variable rate loan lets them put that money down, reduce the interest they're paying, and pull it back out if they need it for a bond or moving costs.

How Variable Rates Are Structured

Variable rates on investment loans are typically priced higher than owner-occupied rates, often by 0.20 to 0.50 percentage points, depending on the lender and your loan-to-value ratio. Lenders treat investment lending as higher risk under regulatory capital rules, and that flows through to pricing.

If you're borrowing at 80 per cent LVR or below, you'll usually see the most competitive pricing. Above that threshold, you'll likely pay Lenders Mortgage Insurance, and the rate may also increase slightly. Some lenders offer tiered pricing where the rate improves if you borrow a larger amount or hold multiple products with them.

Principal and Interest vs Interest Only

Most lenders will offer both principal-and-interest and interest-only repayment options on a variable rate investment loan. Interest-only terms typically run for one to five years, after which the loan reverts to principal and interest unless you negotiate a further interest-only period.

If you're working through a separation and cash flow is tight in the short term, interest-only repayments can lower your monthly commitment while you stabilise. The downside is that you're not reducing the debt, so your loan balance stays the same and you'll pay more interest over the life of the loan. If your goal is to reduce debt and rebuild equity after a split, principal and interest makes more sense once your income steadies.

In our experience, separating couples who hold onto an investment property often start with interest-only to manage immediate cash flow, then switch to principal and interest once they've refinanced or sorted out their living situation. The flexibility to make that switch without penalty is one reason a variable rate can work well during this period.

Offset Accounts and Redraw

Most variable rate investment loans come with either an offset account or a redraw facility. An offset account is a transaction account linked to your loan. The balance in the account offsets the loan balance when calculating interest, so if you have a $400,000 loan and $20,000 in offset, you're only charged interest on $380,000.

A redraw facility lets you make extra repayments beyond the minimum and then withdraw those funds later if you need them. The difference is that redraw is typically less accessible than offset, sometimes requiring a few days' notice or attracting a small fee, and not all lenders allow unlimited redraws.

For someone separating, an offset account can be particularly useful if you're receiving a property settlement payment and want to reduce interest costs without locking the money away. You keep full access to the cash while lowering your loan interest day to day. Just be aware that for tax purposes, keeping settlement funds in an offset linked to an investment loan can create complications if those funds are later used for private purposes. Speak to an accountant before you move large sums around.

Refinancing and Switching Between Rates

One of the main advantages of a variable rate loan is that you can refinance to another lender or switch to a fixed rate without paying break costs. If your situation changes after a separation, perhaps your income improves, you want to consolidate debt, or you find a lender offering better features, you're not locked in.

In a scenario like this, someone might have taken out an investment loan during the separation when their borrowing capacity was lower and they could only access a higher rate or a smaller lender panel. Twelve months later, they've moved into a new rental, their income has increased, and they want to refinance to get a lower rate or access better loan features. With a variable rate, they can do that without penalty.

If you're considering a switch to fixed, remember that fixed rates don't allow extra repayments beyond a small annual threshold, usually between $10,000 and $30,000 depending on the lender. You also lose access to offset and redraw in most cases. That trade-off might be worth it if you want repayment certainty, but it's less useful if you're still in a transitional phase and need room to move.

What Happens When Rates Move

Variable rates move in response to changes in the Reserve Bank's cash rate and shifts in funding costs for lenders. If the cash rate rises, your repayments will increase, sometimes within a few weeks of the announcement. If it falls, repayments drop.

That uncertainty can feel uncomfortable if you're already managing a tight budget post-separation. But lenders assess your ability to service the loan at a rate well above the actual product rate, using a buffer that currently sits at 3 percentage points above the loan rate. So if you've been approved, the lender has already factored in your ability to handle rate increases to some degree.

If you're worried about rate rises, you can split your loan between variable and fixed. This gives you some repayment certainty on the fixed portion while keeping flexibility on the variable portion. It's not something every lender offers on investment loans, but it's worth asking about if you want a middle path.

Borrowing Capacity and DTI Limits Under Current Rules

From 1 February 2026, lenders have been required to cap high debt-to-income lending at 20 per cent of their new investor loan book, with DTI measured as total debt divided by gross annual income. If your total borrowings are more than six times your gross income, you may find fewer lenders willing to approve your application, or you may need a larger deposit or stronger income evidence.

For separating couples, this can create a practical hurdle if you're trying to keep an investment property and borrow in your own name. If you previously qualified based on two incomes, your borrowing capacity on a single income will be lower. You might need to increase your deposit, bring in rental income from the investment property to boost serviceability, or wait until your income improves before you can refinance or purchase another property.

Lenders will include at least 80 per cent of the expected rental income in their serviceability assessment, though some will use 100 per cent if you provide a signed lease. They'll also deduct property expenses like council rates, insurance, strata fees if applicable, and an allowance for vacancy and maintenance.

Should You Fix Part of the Loan?

Splitting your investment loan between variable and fixed rates can give you partial certainty without losing all flexibility. You might fix half the loan for two or three years to lock in a portion of your repayments, and leave the other half variable so you can make extra repayments, use offset, and refinance that portion if needed.

The challenge is that splitting adds complexity. You'll have two loan accounts, sometimes two sets of fees, and if you want to refinance later, you'll need to manage the fixed portion separately or wait until the fixed term ends. For someone still working through a separation and trying to keep their finances straightforward, a single variable loan is often more manageable.

If you do decide to split, make sure the variable portion is large enough to be useful. Fixing 90 per cent and leaving 10 per cent variable doesn't give you much room to make extra repayments or use offset effectively.

Negative Gearing and the Changes from July 2027

If you purchased your investment property before 7:30pm AEST on 12 May 2026, the existing negative gearing rules continue to apply, which means you can offset your net rental loss against your salary or other income. For properties purchased on or after that date, from 1 July 2027, rental losses can only be offset against other residential rental income or carried forward, not against your wages.

If you're keeping a property that you and your former partner bought years ago, you're grandfathered under the old rules even if you refinance the loan into your sole name. That can make a big difference to your after-tax position, especially in the early years when interest costs and other expenses often exceed rental income.

If you're looking at buying your first investment property after separation, the new rules mean you won't get the same upfront tax benefit unless you're buying an eligible new build that increases the dwelling count. You'll still be able to claim interest and other expenses, but the deduction only helps if you have other rental income or when you eventually sell the property and offset the loss against your capital gain.

When Variable Might Not Suit

A variable rate works well when you need flexibility, but it's not the right fit for everyone. If you're on a fixed income, have no savings buffer, and would struggle if repayments increased by $200 or $300 a month, a fixed rate might give you more certainty during a time when everything else feels uncertain.

Similarly, if you know you won't be making extra repayments and you don't need access to offset or redraw, you're paying for features you won't use. In that case, a fixed rate might be priced more competitively, especially if you're locking in for two or three years.

Another scenario where variable might not suit is if you're planning to sell the property within 12 to 18 months. In that case, you want the loan structure to be as straightforward as possible, with minimal fees and no complications at discharge. A variable rate will do that, but so will a low-fee fixed loan if the rate is comparable.

Call one of our team or book an appointment at a time that works for you. We'll look at your situation, your income, and what you're trying to achieve, and help you work out whether a variable rate investment loan fits where you're heading.

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