Variable rate interest-only investment home loans explained
Some investors may opt to make interest-only repayments on their variable rate investment property loan. To understand why this type of loan set-up may be worth considering, let's look at the benefits and how it works.
How does a variable rate investment home loan work?
The interest rate on a variable rate investment home loan can fluctuate over time. Generally, variable mortgage rates change in line with the cash rate set by the Reserve Bank of Australia (RBA). But banks can change rates for other reasons too. A variable rate means your mortgage repayments will be lower when interest rates drop but higher when interest rates rise.
Investors may prefer an investment home loan with a variable interest rate for the greater flexibility it typically offers compared to a fixed rate. This can include the ability to make unlimited extra repayments (especially when rates drop) and to access more home loan features that can save investors interest over time.
What is an interest-only investment loan?
Interest-only is a repayment option on your investment home loan where you only pay the interest component for a set period (up to five years) without reducing the principal amount.
Interest-only loans are a popular option for investors as repayments are lower, and you can claim higher interest repayment tax deductions. This can free up cashflow to re-invest into the property or elsewhere or to pay other debts.
Throughout the interest-only period, you're not reducing the principal balance, which means you'll need a plan to repay the loan amount at some point.
At the end of the interest-only period, investors may choose to:
- Switch to principal and interest (P&I) repayments to pay both the loan principal and interest, resulting in higher repayments
- Refinance to extend the interest-only period, further delaying principal repayments
- Sell the property at the end of the interest-only period and use the sale funds to pay out the loan
Mansour Soltani , Home Loans Expert
“It’s important to have a plan to repay your principal or have a clear exit strategy, depending on the product you choose. For example, if you’re expecting some capital growth within five years, you could opt for a five-year interest-only home loan and then sell the property afterwards to make a return. Each investor will have a different goal, so it’s best to speak to a financial adviser or mortgage broker about your options."
Mansour Soltani , Home Loans Expert
What is a good variable interest rate on an interest-only investment home loan?
The best variable investment loan rates will depend on your deposit (or equity), loan amount and credit profile.
To give you an idea of what’s available right now:
- The lowest variable rate for interest-only investment home loans on Money’s database is: 0% (comparison rate^ 3.63%)
- The average variable rate on interest-only investment home loans on Money’s database: 6.37%
Investment home loans generally have higher interest rates because investors are considered riskier borrowers than owner-occupiers.
Investment home loan features
Extra repayments
Make additional (sometimes unlimited) repayments on top of your minimum mortgage repayments. Investors may make extra repayments when rates drop without impacting their budget. Making additional repayments reduces your loan balance, interest costs and loan term.
Redraw facility
Allows you to withdraw any extra repayments you've made on your home loan. Investors can use their redraw facility for any purpose, including to fund renovations of the property, to finance other projects or to pay other debts.
Portability
You can transfer your existing loan to a new property if you sell and buy another investment property.
Offset account
An offset account is a transaction account linked to your investor home loan account to reduce your interest owed. The balance in your offset home loan account is subtracted from your mortgage balance and interest. Investors can still access the money in their offset at any time.
Flexible repayments
You can choose your repayment frequency (e.g. weekly, fortnightly, or monthly) or opt for an interest-only repayment option for a period of time.
Should you choose a variable or fixed rate for your investment home loan?
It will depend on the market and the rates you can access. Variable rates can be ideal for investors who keep up with the market and want access to additional loan features.
For example, investors can deposit funds into their offset account to reduce their interest payable or use the funds in their redraw facility to add to regular repayments when rates go up.
How to compare investment property home loans
1
Look at the advertised rate
Compare the advertised rate of different investor home loans to estimate your interest-only monthly repayments. Keep in mind that the lowest interest rate isn’t necessarily going to be the cheapest option. Home loan features, fees, and your loan term will be part of the equation. Look at the entire loan package to see which will save you the most money on your loan over time.
2
Check the comparison rate
It’s important to look at the comparison rate, which gives you a more comprehensive view of the overall cost of a loan, including interest and fees. It’s a more accurate cost comparison to use across lenders and products. Your individual rate may differ depending on your loan-to-value ratio (LVR) and loan amount.
3
Consider home loan fees
While some home loan fees may be tax deductible, don’t rest on your laurels. You still want to find an investment loan with lower fees or a simple fee structure to help with budgeting and record keeping.
4
Choose the right home loan features
Variable rate investment loans come with a host of features that can help investors reduce their interest bill and pay their debt off faster. An offset account (or multiple offset accounts) and a redraw facility are two features to look for. You could also switch your home loan repayments from monthly to fortnightly to shave years off your mortgage.
