The Costs and Benefits of Variable Rate Investment Loans

When you're looking at buying an investment property, understanding variable rate investment loans is crucial for making informed decisions. As an ADF member, you have access to investment loan options from banks and lenders across Australia, often with specialised terms that recognise your stable employment.

What Are Variable Rate Investment Loans?

A variable interest rate investment loan means your interest rate can change during the loan term. Unlike fixed interest rates that remain the same for a set period, variable rates move up or down based on market conditions and lender policies. This affects your loan repayments and overall investment strategy.

When buying a rental property, variable rates offer flexibility. You can make extra repayments without penalties, access redraw facilities, and often benefit from interest rate discounts when rates fall.

Key Fees and Costs to Consider

Before applying for an investment loan, you'll need to understand the various costs involved:

• Application fees: Charged by lenders to process your investment loan application
• Valuation fees: Required to assess the property value for loan approval
• Lenders mortgage insurance (LMI): Usually required when your loan to value ratio (LVR) exceeds 80%
• Ongoing fees: Monthly or annual account keeping fees
• Settlement fees: Costs associated with finalising your loan

Additionally, you'll face property-related costs like stamp duty, building and pest inspections, and conveyancing fees when buying an investment property.

Understanding Loan to Value Ratios

The loan amount you can borrow depends heavily on your loan to value ratio (LVR). Most lenders allow up to 80% LVR for investment properties without LMI. This means for a $500,000 apartment or town house, you'd need at least $100,000 deposit plus additional funds for costs.

Investment Property Options for ADF Members

Whether you're considering a stand alone dwelling, apartment, or town house, research property options thoroughly. Your first investment property should align with your borrowing capacity and property investment strategy.

Key factors include:

1. Location and rental yield: Areas with strong rental demand
2. Property type: Each has different maintenance and vacancy considerations
3. Growth potential: Research property market trends in your target area
4. Negative gearing benefits: Understanding tax implications

The Application Process

The investment loan application requires thorough documentation. Lenders typically request:

• Recent bank statements (usually 3-6 months)
• Pay slips and group certificates
• Existing investment property portfolio details
• Proof of savings for deposit and costs

Many lenders offer a streamlined application process for ADF members, recognising the stability of defence force employment.

Calculating Investment Loan Repayments

When calculating investment loan repayments, consider that investment loan interest rates are typically higher than owner-occupier rates. However, the interest is tax-deductible, which affects your overall return.

For example, on a $400,000 rental property loan at 6.5% interest rate, principal and interest repayments would be approximately $2,530 per month. The actual cost after tax benefits depends on your marginal tax rate and negative gearing position.

Benefits of Variable Rates for Property Investment

Variable rate loans offer several advantages:

• Flexibility: Make extra repayments without penalties
• Rate decreases: Benefit when the investment loan interest rate falls
• Features: Access to offset accounts and redraw facilities
• No break costs: Switch loans without fixed-rate penalties

Potential Drawbacks

Consider these challenges:

• Rate increases: Your repayments can rise unexpectedly
• Budgeting difficulty: Harder to predict exact costs
• Market volatility: Rates can change frequently

Investing in real estate requires careful planning, especially when building an investment property portfolio. Variable rates can work well if you have flexibility in your budget and can handle repayment fluctuations.

Call one of our team or book an appointment at a time that works for you to discuss how variable rate investment loans could fit your property investment strategy.