Why Should ADF Investors Use Variable Rate Loans?

A variable rate investment loan lets you pay off debt faster when your cash flow allows, and slow down when postings or deployments change your budget. That flexibility is the main reason many ADF investors look at it first.

This article covers how extra repayments work on a variable rate, the trade-offs, and how to decide if it suits your plan. If you are in or near Blackwood Forest and weighing up a property investment loan, this is for you.

Why Choose a Variable Rate Investment Loan?

A variable rate investment loan has an interest rate that your lender can change over time, and it often allows extra repayments. A fixed rate may limit extra repayments, depending on the lender and product, so it pays to check the terms.

The trade-off is that your repayments can go up. Lenders assess new borrowers at a rate at least 3.0 percentage points above the loan rate, so your borrowing power is tested for that kind of rise. Even so, you need room in your budget for increases. For a view on how a lower rate could help, see our page on getting a lower interest rate.

How Do Extra Repayments Work on an Investment Loan?

Extra repayments reduce your loan balance sooner, so interest is charged on a smaller amount. On a variable rate, many lenders let you pay extra without a penalty, but features differ between lenders and products.

The key point for investors is tax. Only the interest on an investment loan is deductible. The principal part of a repayment is not. So extra repayments cut the interest you pay, and the interest you can claim falls with it. Speak with your accountant about how this applies to you. Extra repayments reduce a real cost, though, so a lower deduction does not make them a poor choice by itself.

Extra Repayments Example: A Mid-Deployment Windfall

Consider an ADF member with a $500,000 investment loan at an illustrative rate of 6.75% p.a. over 30 years, on principal and interest. The repayment works out to about $3,243 a month. In the first month, interest is about $2,813 and about $430 reduces the loan.

Now say they receive a deployment allowance and put $10,000 straight onto the loan. The balance drops to about $489,570 after the first repayment. Interest in the next month is then about $2,754 rather than about $2,810. That is roughly $56 a month less interest, while the repayment stays the same, so more of each repayment goes to principal from then on.

The outcome is a lower interest bill each month and a shorter loan. The cost is that the $10,000 is now tied up in the loan. If the loan has no redraw or offset, getting it back may mean applying to the lender. Figures here are illustrative only. Use our borrowing capacity calculator to test your own numbers.

Offset Account or Extra Repayments: Which Suits an ADF Investor?

An offset account keeps your cash accessible while still cutting the interest charged. Extra repayments put the cash into the loan, where it may be harder to get back unless there is a redraw facility.

This matters if your postings change. An offset balance reduces the interest charged, so the interest you can claim is lower. It does not reduce the loan balance. Offset balances also do not reduce the loan amount for LVR purposes. Some offset accounts carry fees or a higher rate, and whether the offset is full or partial depends on the lender, so check the product terms.

Redraw needs more care. If you redraw money for personal use, such as a car or a holiday, that part of the loan is no longer deductible. The ATO treats each redraw as a separate borrowing, based on how you use the funds. Keep records and ask your accountant before you redraw.

Should You Pay Extra or Hold Cash for the Next Purchase?

Holding cash can suit you if you plan to buy again soon, because it keeps your options open. Paying down the loan suits you if you want certainty and lower debt.

Second example: an ADF investor with a rental near Blackwood Forest wants to add a second property in a couple of years. They keep their spare cash in an offset account instead of paying the loan down. The interest charged still falls, and the cash is ready for a deposit and costs. The outcome is flexibility, though the loan balance stays higher. If they later want to use equity, our page on equity release loans explains how that works. Remember that borrowing against equity only gives a tax deduction on interest if the funds are used for investment purposes.

If you want to grow further, see expanding your property portfolio.

Does the Negative Gearing Change Affect Extra Repayments?

The change affects how rental losses are used, not whether loan interest is deductible. Properties held at 7:30pm AEST on 12 May 2026 keep their current treatment. From the 2027-28 income year, net rental losses on established residential properties bought after that time can only be used against other residential property income.

If you bought after that time, extra repayments that cut interest may reduce the loss you carry forward. Your accountant can tell you how the rules apply to your situation. A loan health check can also show whether your current loan structure fits.

Buying an investment property is a big step for a serving member. Defence Loans works with ADF members, so we understand pay cycles, postings and deployments. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions