Understanding Variable Rate Investment Loans
When buying an investment property, selecting the right investment loan structure is crucial for your property investment strategy. Variable rate loans remain a popular choice among property investors due to their flexibility and potential for interest rate discounts when market conditions shift. However, understanding the fees and costs associated with these products is essential for calculating investment loan repayments accurately and maximising tax deductions.
A variable interest rate means your interest rate can move up or down throughout the life of your loan. This differs from a fixed interest rate, which locks in your rate for a set period. While variable rates can fluctuate, they often come with investment loan features that provide additional flexibility for portfolio growth.
Key Fees Associated with Variable Rate Investment Loans
Property investors need to understand the various fees that can impact their investment loan amount and overall returns. Here are the main costs to consider:
Application and Establishment Fees
Most lenders charge an upfront application fee when you apply for an investment property loan. This fee typically ranges from $0 to $1,000 and covers the administrative costs of processing your investment loan application. Some lenders waive this fee as part of promotional offers or when you access investment loan options through a mortgage broker.
Valuation Fees
Lenders require a professional property valuation to assess the loan to value ratio (LVR) and determine how much they're willing to lend. Valuation fees usually cost between $200 and $600, depending on the property location and type. For strata properties with body corporate arrangements, valuations may be more complex.
Lenders Mortgage Insurance (LMI)
When your investor deposit is less than 20% of the property value, Lenders Mortgage Insurance becomes applicable. LMI protects the lender if you default on your loan and can cost anywhere from a few thousand to tens of thousands of dollars, depending on your LVR and loan amount. While this is a significant upfront cost, it's often capitalised into your investment property finance, and the premium may be a claimable expense for tax purposes.
Ready to get started?
Book a chat with a Finance & Mortgage Broker at Grove Financial today.
Ongoing Costs and Charges
Monthly Service Fees
Many variable rate investment loan products include monthly service fees, typically ranging from $5 to $15 per month. While these might seem minimal, they add up over the life of your rental property loan. Some lenders offer fee-free packages in exchange for slightly higher investor interest rates.
Annual Package Fees
Professional packages that bundle multiple investment loan features together often include annual fees between $200 and $400. These packages may provide benefits such as:
- Rate discounts on your variable interest rate
- Offset accounts to reduce interest charges
- Free redraw facilities
- Discounts on other banking products
- Fee waivers on certain transactions
Redraw and Transaction Fees
If you're making principal and interest repayments, you might build up additional funds in your loan account. Variable rate loans typically allow redraw access, though some lenders charge $10 to $50 per redraw transaction. Understanding these costs is important when planning your cash flow and building wealth through property.
Investment Loan Features That Add Value
While fees are important, the investment loan benefits offered by variable rate products can outweigh the costs:
Offset Accounts
An offset account linked to your investment property rates allows you to reduce interest charges without making additional repayments. This provides flexibility while maintaining access to your funds for covering vacancy rate periods or unexpected property expenses.
Interest Only Investment Options
Many property investors choose interest only investment structures to maximise tax deductions through negative gearing benefits. Variable rate loans typically offer interest only periods of 1 to 5 years, after which the loan converts to principal and interest unless you negotiate an extension.
Unlimited Additional Repayments
Variable rate loans generally allow unlimited additional repayments without penalties, unlike fixed rate alternatives. This flexibility supports various property investment strategies and helps you leverage equity for future property purchases.
Costs When Refinancing or Exiting
Discharge Fees
When you decide to pursue an investment loan refinance or sell your investment property, lenders charge discharge fees ranging from $150 to $400. This covers the administrative costs of removing their mortgage over your property.
Settlement Fees
Your solicitor or conveyancer will charge settlement fees for managing the legal aspects of your property transaction. These typically cost between $800 and $2,000, depending on the complexity of your purchase.
Managing Your Investment Property Finance Costs
Calculating Total Costs
When comparing investment loan options from banks and lenders across Australia, look beyond the advertised interest rate. Use a loan repayment calculator to factor in all fees and charges to understand the true cost of your investor borrowing.
Tax Deductibility
Most fees associated with your investment property loan are claimable expenses, helping you maximise tax deductions. This includes:
- Loan establishment fees
- Lenders Mortgage Insurance premiums
- Ongoing loan account fees
- Interest charges
Consult with your accountant to ensure you're claiming all eligible deductions and optimising the tax benefits of your investment.
Negotiating Better Terms
Working with an experienced mortgage broker can help you negotiate rate discounts and reduced fees. At Grove Financial, we access investment loan products from multiple lenders, allowing us to compare options and secure competitive terms that suit your specific property investment strategy.
Building Your Investment Portfolio
Understanding fees and costs is just one aspect of successful property investing. Consider how your loan structure supports your goals:
- Will you need rental income to service the loan, or can you cover shortfalls from other sources?
- Are you focused on generating passive income or building wealth through capital growth?
- How does stamp duty impact your initial investment and overall returns?
- What's your strategy for portfolio growth and achieving financial freedom?
Variable rate investment loans offer flexibility that supports evolving investment strategies. As you build your portfolio and leverage equity from existing properties, having adaptable loan features becomes increasingly valuable.
Whether you're buying your first investment property or expanding an established portfolio, understanding the full cost structure of variable rate loans helps you make informed decisions. The right investment loan features combined with strategic planning can support your journey toward building wealth through property.
Call one of our team or book an appointment at a time that works for you. Grove Financial specialises in helping NSW property investors structure their investment property finance for long-term success.
