How to Use Variable Rate Loan Features

What a Variable Rate Loan Actually Includes

A variable rate loan is not just an interest rate that can move up or down. Most variable rate products include an offset account, unlimited additional repayments, and a redraw facility. These features let you reduce interest costs without locking yourself into a fixed term, but they only work if you structure your loan and accounts correctly from the outset.

Consider someone posted to RAAF Base Richmond who takes out a variable rate owner occupied loan with a linked offset account. They direct their salary into the offset and leave it there until bills are due. Every dollar sitting in that account reduces the balance on which interest is calculated, which means the loan costs less each month without requiring them to make a formal extra repayment. The difference between using an offset and leaving funds in a separate transaction account can amount to thousands of dollars in saved interest over the life of the loan, depending on the loan amount and how much is kept in the offset.

Offset Accounts and How They Reduce Interest

An offset account is a transaction account linked to your home loan that reduces the balance on which interest is charged. If your loan balance is $500,000 and you have $20,000 in your offset, you only pay interest on $480,000. The account operates like any other transaction account, which means you can deposit your pay, withdraw cash, and use a card, but every dollar in it is working to reduce your interest.

Not all variable loans include a full offset. Some lenders offer partial offsets that only reduce interest on a percentage of the balance held in the account, typically 40% to 60%. A full offset is standard with most variable rate products from major lenders, but it's worth confirming during the home loan application process. Members posted to Richmond who use Defence Bank, for example, often have access to a full offset with no monthly account fees, which makes the feature more effective over time.

Unlimited Additional Repayments Without Break Costs

Variable rate loans allow you to make additional repayments at any time without penalty. This means you can pay more than your minimum monthly repayment whenever you have surplus income, such as after a posting allowance is paid or when you receive a tax refund. Those additional repayments reduce your principal, which in turn reduces the interest you pay over the remaining loan term.

In our experience, ADF members who increase their repayment by even $200 per fortnight can cut years off a 30-year loan term and reduce total interest paid substantially. The key difference between this and a fixed rate loan is that you can make those additional repayments without incurring break costs, and you can also access the funds again if needed through a redraw facility.

Redraw Facilities and How They Work

A redraw facility lets you access any additional repayments you've made above the minimum required amount. If you've paid an extra $10,000 into your loan over the past year, you can redraw that amount if you need it for an unexpected expense or opportunity. The redraw function is typically available through online banking, though some lenders charge a small fee or limit the number of redraws per year.

Redraw is not the same as an offset. Funds in an offset remain in a separate account and can be withdrawn at any time without restriction. Funds in redraw are part of your loan balance and may be subject to lender conditions. For example, some lenders require you to leave a minimum amount in the loan or restrict redraw if the loan is in arrears. Members who anticipate needing regular access to surplus funds are usually advised to prioritise an offset over relying on redraw.

Portability and What It Means for Posted Members

Most variable rate loans are portable, which means you can transfer the loan to a new property without discharging and reapplying. If you're posted from Richmond to another base and decide to sell your current property and purchase another, portability allows you to keep your existing loan terms, rate discount, and LMI waiver without starting from scratch. This can save time and avoid the costs associated with discharging a loan and paying for a new application and valuation.

Portability is not automatic. You need to notify your lender, and they will assess the new property to confirm it meets their lending criteria. If the new property is more expensive, you may need to apply for additional funds, which will be assessed under current lending standards. If the property is cheaper, the loan is simply reduced to match the new purchase price. The process typically takes a few weeks, so it's worth starting the conversation with your broker as soon as you know you're being posted.

Split Rate Structures and Combining Variable Features with Fixed Certainty

A split rate loan lets you divide your borrowing between a variable portion and a fixed portion. You might put 50% on a fixed rate to lock in certainty on half your repayments, and keep the other 50% on a variable rate to take advantage of offset accounts and additional repayment flexibility. This structure is common among ADF members who want to reduce risk without giving up the features that come with a variable loan.

Split loans are particularly relevant when fixed rates are lower than variable rates, or when you expect rates to rise but still want access to an offset. The split can be structured in any proportion, such as 70% fixed and 30% variable, depending on your priorities. Keep in mind that the fixed portion will not have offset or redraw features, and you'll incur break costs if you pay out that portion early. The variable portion operates as normal, with full access to all standard features.

Loan Structure and How It Affects What You Can Access

The way your loan is structured determines which features you can use and how effectively they work. If you have multiple loans under one facility, such as a variable owner occupied loan and a separate investment loan, each loan will have its own offset account. Funds in the offset linked to your owner occupied loan will not reduce interest on your investment loan, and vice versa.

This distinction matters for tax purposes. Interest on an investment loan is generally tax deductible, while interest on an owner occupied loan is not. Keeping the two loans and offsets separate ensures you can substantiate your claims if the Australian Taxation Office reviews your return. Members who plan to convert their current home to an investment property after a posting should speak to a broker before making additional repayments into that loan, as paying down the principal can reduce the deductible interest component.

Rate Discounts and How to Keep Them Active

Most variable rate loans include a rate discount off the lender's standard variable rate. That discount might be 0.70% or 1.00%, depending on the lender, your loan size, and whether you're using an LMI waiver available to ADF members. The discount is not permanent. Lenders can reduce or remove it if your circumstances change, such as switching from owner occupied to investment, or if you reduce your loan balance below a certain threshold.

Some lenders also offer conditional discounts that require you to hold other products with them, such as a transaction account or insurance policy. If you close that account, the discount may revert. Members who refinance or restructure their loans should confirm whether their rate discount will carry over or whether they'll be moved to a different product with a smaller discount. In our experience, it's not uncommon for a discount to be quietly reduced after a few years, which is why reviewing your loan annually is worthwhile.

If you're ready to confirm which features are active on your current loan or want to compare variable rate products, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions