Understanding Variable Rate Investment Loans

Variable rate investment loans charge interest that moves up or down in line with the lender's decisions.

Most lenders adjust their variable rates when the Reserve Bank changes the cash rate, though the amount and timing of the shift is never guaranteed. Your repayment can change without warning, which means your cashflow needs a buffer if you're relying on rental income to cover most of the loan.

How Variable Rates Are Set on Investment Loans

Investment loans sit higher on the lender's risk scale than owner-occupied loans, so the variable rate starts higher. That gap typically runs between 0.30 and 0.80 percentage points, depending on your deposit size, loan amount, and the lender's appetite for investor lending at the time you apply. Lenders also hold the right to move their investor rate independently of their owner-occupied rate, which has happened during periods when lending restrictions tighten.

Your rate is made up of the lender's standard variable rate, minus any discount negotiated at the time of application. That discount might be a flat 0.60 percentage points off the standard rate, for instance. When the lender lifts its standard rate, your discounted rate lifts by the same amount, unless the lender also changes the discount structure, which occasionally occurs during a mortgage refinance.

Why the Rate Moves More Than the Cash Rate Sometimes

Lenders don't always pass on Reserve Bank changes in full, and they don't always wait for a cash rate shift to adjust their own rates. Funding costs, capital requirements under APRA prudential standards, and competition all feed into pricing decisions. When an ADI needs to hold more capital against investor loans, that cost flows through to the rate you pay.

Consider a high school teacher who took out a variable rate investment loan 18 months ago at 6.10 per cent with a 0.70 percentage point discount off the standard rate. The lender's standard investor rate was 6.80 per cent at the time. The Reserve Bank has since moved the cash rate down twice, but the lender passed on only one of those cuts and added 0.10 percentage points to its standard investor rate to cover a change in capital settings. The borrower's rate is now 6.20 per cent, even though the cash rate fell.

Interest Only Versus Principal and Interest on a Variable Rate

A variable rate applies to both interest-only and principal-and-interest repayments, but the rate itself is sometimes higher when you pick interest-only. Lenders treat interest-only as a riskier structure because the loan balance doesn't reduce, so you might see an additional margin of 0.10 to 0.25 percentage points during the interest-only period.

An interest-only period usually runs for one to five years. Once that period ends, the loan converts to principal and interest, and your repayment jumps because you're now paying down the loan balance as well as covering the interest. If the variable rate has also moved up during the interest-only period, the repayment shift can be significant. The other side is that interest-only repayments lower your monthly cost during the holding period, which can help if rental income is tight or you're holding the property for capital growth rather than income.

Loan Features That Come With Variable Rate Investment Loans

Variable rate products let you make extra repayments without penalty, provided the loan structure allows it. Most lenders cap extra repayments during an interest-only period, but once the loan switches to principal and interest, you can usually pay more without restriction. Some products include an offset account linked to the investment loan, though offset on investor loans is less common than on home loans for teachers, and the rate discount is often smaller if you include offset.

Redraw is another feature, letting you pull back extra payments if you need access to cash later. Redraw on an investment loan has tax implications, though. If you withdraw funds and use them for a private purpose, the interest on that portion of the loan stops being deductible. Keep the use of redrawn funds tied to the investment property or another income-producing purpose if you want the deduction to continue.

When a Fixed Rate Might Suit You Instead

A fixed rate locks your repayment for a set term, usually one to five years, and removes the risk of rate rises during that period. It also removes the chance to benefit if rates fall. Teachers who want certainty over their monthly budget sometimes split the loan, fixing part and leaving part variable. That structure lets you lock in some protection while keeping access to extra repayment features on the variable portion.

Fixed rates on investment loans can sit higher or lower than variable rates depending on where the market expects rates to move. When you lock in, you're also locking in any break costs if you need to refinance your investment loan or sell the property before the fixed term ends. Break costs apply when the lender's funding cost has changed since you fixed, and they can run into thousands of dollars if rates have fallen sharply.

How Your Deposit Size Affects the Rate You're Offered

Lenders price investment loans on a sliding scale based on your loan-to-value ratio. A deposit of 20 per cent or more keeps you under the 80 per cent LVR threshold, which avoids lenders mortgage insurance and usually unlocks the sharpest rate discount. If your deposit sits between 10 and 20 per cent, you'll pay LMI, and the rate discount narrows. Some LMI waivers for teachers apply to owner-occupied loans but not to investment loans, so check what's available before assuming the waiver extends to your investor purchase.

Debt-to-income limits also affect how much you can borrow. APRA caps high-DTI lending at 20 per cent of each lender's new investor loans, so if your total borrowing sits at six times your gross income or above, your application might be declined or approved at a higher rate to compensate for the added risk.

Serviceability Testing and the Three Percentage Point Buffer

Every lender tests your ability to service the loan at a rate that's at least three percentage points above the actual product rate. If you're applying for a variable rate investment loan at 6.00 per cent, the lender assesses your income and expenses as though the rate is 9.00 per cent. That buffer protects you and the lender against rate rises, but it also limits how much you can borrow, particularly if you're holding other debt or your rental income isn't counted in full.

Rental income is usually assessed at 80 per cent of the expected market rent to account for vacancy and maintenance costs. If you're buying an apartment in a building with high vacancy, some lenders apply a sharper discount to the rental income, which tightens your borrowing capacity further. Your borrowing capacity depends on your salary, existing commitments, and how the lender treats your rental income, so run the numbers with a mortgage broker for teachers before you settle on a property.

What Happens When the Rate Moves Mid-Loan

When your variable rate changes, the lender adjusts your minimum repayment to match. If you're on principal and interest, a rate rise increases your repayment. If you're on interest-only, the repayment rises in proportion to the rate shift. Some lenders notify you a few days before the change, others notify you after. Either way, the shift is immediate once the lender implements it, so your offset balance or rental income needs to cover the gap without delay.

If your repayment rises and your rental income doesn't, you're covering the shortfall from your salary. That shortfall is still deductible as a holding cost under current negative gearing rules, provided the property was held or under contract before 12 May 2026. If you purchased after that date and the property isn't a new build, losses can only be offset against other residential property income from the 2027-28 income year onward.

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