Simple hacks to maximise your investment loan repayments

Can you make extra repayments on a variable rate investment loan?

You can make extra repayments on a variable rate investment loan, and most lenders let you redraw those funds later without needing approval. That flexibility makes variable rate loans worth a look if you want to park surplus cash somewhere it offsets debt but stays available for other purchases, renovations or covering a vacancy.

The reason this matters in Dulwich Hill is that quite a few investors here are also owner-occupiers who've bought a second property nearby. You might have rental income rolling in most of the time, but when a tenant gives notice or a hot water system needs replacing, being able to pull cash back out without refinancing keeps things moving.

How extra repayments work on an interest-only investment loan

Even if your loan is interest-only, extra repayments go straight onto the principal. The lender recalculates your interest charge each month based on the outstanding balance, so you pay less interest overall. The catch is that your minimum monthly payment stays the same until the interest-only period ends or you refinance.

Consider a scenario where someone owns a two-bedroom terrace on the western side of Dulwich Hill, rented at current market rate. They make an extra $500 payment each month during the interest-only period. After twelve months, they've reduced the loan balance by $6,000. The interest saved depends on the rate, but more importantly, they've still got access to that $6,000 through redraw if a tenant leaves or the property needs work. The interest-only minimum doesn't change, so the monthly commitment stays predictable.

What happens to your tax deduction when you redraw?

This is where people trip up. Interest on money borrowed to buy or hold an investment property is deductible. Interest on money borrowed for private use is not, even if the loan is secured against your investment property. When you redraw funds, the ATO expects you to prove what you spent that money on. If you redraw $10,000 and use it to renovate your own home, the interest on that $10,000 is no longer deductible. If you use it to repaint the rental or replace the stove, it stays deductible.

The simplest way to manage this is to keep redraws for property-related costs only, or at least keep records that show exactly what the money was used for. If you're planning to use redraw for private purposes, talk to your accountant first. Mixing private and investment purposes in the one loan makes your tax return a lot messier.

Variable rate versus fixed rate for investors who want flexibility

Fixed rate loans don't usually let you make extra repayments beyond a small annual cap, often around $10,000 to $20,000 depending on the lender. Go over that and you'll wear break costs. Variable rate loans don't have that problem. You can pay as much as you like, whenever you like, and redraw it later.

That flexibility suits investors who get irregular income, like bonuses or commission, or who want the option to deploy cash into another property without selling the first one. If you're planning to build a portfolio rather than hold one property long-term, a variable rate loan with full redraw is usually the better fit. If you need payment certainty and won't be making extra repayments anyway, a fixed rate might make more sense, but you lose the redraw safety net.

Why offset accounts are less common on investment loans

Some lenders offer offset accounts on investment loans, but they're not as common as they are on owner-occupier loans, and the interest rate is often slightly higher. An offset account works like redraw in that it reduces the interest you pay, but the cash sits in a separate transaction account rather than being paid onto the loan itself.

The difference matters for tax. Money in an offset account hasn't reduced your loan balance, so the full loan amount stays deductible. Money paid onto the loan as an extra repayment does reduce the balance, and if you redraw it for private use, that portion stops being deductible. For investors who know they'll need to pull money out for non-investment purposes, an offset account keeps things cleaner. For everyone else, redraw is usually sufficient and comes with a lower rate.

Setting up your loan structure before you draw down

You can't bolt on a redraw facility or offset account after settlement unless you refinance. The features you need have to be locked in when you apply. That's why it's worth talking through your plans before you sign anything.

In our experience, investors who plan to buy a second property within a few years benefit from keeping their variable rate loan separate from any owner-occupier debt. If you lump everything into one loan, it becomes difficult to prove which portion of the interest is deductible and which isn't. Lenders can split your borrowing into multiple loan accounts under the one application, so you might have one variable rate loan for the investment property and another loan for your home. It takes an extra ten minutes to set up and saves hours of paperwork later.

Should you fix part of an investment loan and keep part variable?

Some investors split their loan, fixing a portion for rate certainty and leaving the rest variable for flexibility. It sounds clever, but it adds complexity. You'll have two loan accounts with different rates, different repayment requirements, and different rules around extra repayments. Unless you genuinely need the security of a fixed rate and the flexibility of a variable rate at the same time, you're usually paying for features you won't use.

A better approach for most people is to pick the structure that matches your actual behaviour. If you're disciplined about paying extra and want access to those funds, go variable with redraw. If you're not going to pay extra and you want certainty, fix the whole amount. Splitting works if you're managing a large portfolio and want to hedge interest rate risk, but for a single investment property in Dulwich Hill, it's often overkill.

How to check if your loan has redraw and how much it costs

Most variable rate investment loans include free redraw, but some lenders charge a fee each time you pull money out, and some restrict how often you can redraw or set minimum amounts. Check your loan documents or call the lender. If you're stuck with a loan that charges $50 every time you redraw, and you're doing it quarterly, that's $200 a year for a feature that should be included.

If your current loan doesn't have redraw or charges excessive fees, it might be worth looking at a refinance. Rates have shifted quite a bit over the past couple of years, and if you're on a variable rate that's no longer competitive or you're paying for features you don't need, switching lenders can save you money and give you the flexibility you actually want. We regularly see this with investors who took out their loan a few years ago and haven't reviewed it since.

If you're weighing up whether to make extra repayments or keep cash in a savings account, call one of our team or book an appointment at a time that works for you. We can pull your current loan details, show you what you're paying now, and run the numbers on what's available if you moved. No pressure, just the actual figures so you can make the call yourself.

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