When to Use Variable Rates and Offsets on Investment Loans

A variable rate investment loan with an offset account looks like the obvious choice until you realise linking your personal cash to an investment loan costs you money in tax.

Landscapers often run healthy cash reserves during peak season, and parking that money in an offset sounds sensible. But offsets only make financial sense on investment borrowing if you're planning to pay the loan down aggressively or you're not claiming the interest as a deduction. Most investors want the opposite: maximise deductions, keep repayments low, and redirect surplus cash into the next deposit or back into the business. That means a variable rate loan without an offset, paired with a separate owner-occupied loan where the offset actually saves you money.

Variable Rates Give You Access Without the Lock

Variable rate investment loans let you pay extra, redraw funds, or refinance without penalty. You're not committed to a rate for two or five years, and if your circumstances change or a lender offers a better deal, you can move without paying break costs. For landscapers with seasonal cash flow or plans to pull equity for the next purchase, that flexibility matters more than a fixed rate that might save you half a percent but traps your equity until the term ends.

Consider a landscaper who bought a unit in Geelong as a rental while living in Melbourne. Eighteen months later, land values rose and they wanted to access equity to buy a block closer to home. The loan was variable, so they refinanced to a new lender offering a better rate and a higher valuation, pulling out enough for the next deposit. No break costs, no waiting period, and the process took three weeks. A fixed loan would have cost thousands in exit fees or forced them to wait until the term expired.

Why Offset Accounts Cut Your Deductions

Every dollar you park in an offset linked to an investment loan reduces the interest you're charged. That sounds useful until you realise the interest is tax deductible. If you're paying 6.5 per cent on a loan and claiming that interest at a marginal rate of 37 per cent, each dollar of interest costs you 63 cents after tax. By offsetting $50,000, you save $3,250 in interest but lose $1,203 in deductions. You're better off keeping that cash in an offset linked to your owner-occupied home loan, where the interest isn't deductible anyway, or using it to fund the next investment property deposit.

The only time an offset makes sense on investment borrowing is when you're planning to sell in the next few years and want to minimise the loan balance to reduce capital gains tax, or when you're no longer earning assessable income and the deduction has no value. For most landscapers still working and building a portfolio, it's the wrong structure.

Interest Only Repayments Keep Cash Available

Most variable rate investment loans offer interest only repayment options for the first one to five years. You're only covering the interest charge each month, not paying down the principal, which keeps repayments lower and frees up cash for other uses. That structure works well when you're building a portfolio and need to prove serviceability for the next loan, or when rental income only just covers the mortgage and you don't want to be tipping in extra from your wage.

In our experience, landscapers buying their second or third property often switch existing loans to interest only at the same time to improve their debt serviceability on paper. The lender sees lower monthly commitments, which means you can borrow more for the next purchase. Once the portfolio is complete, you can switch back to principal and interest or keep it interest only and focus on paying down your owner-occupied debt first, depending on what your accountant recommends.

How Lenders Assess Investment Loan Applications

Lenders calculate serviceability on investment loans using the loan amount, a buffer rate three percentage points above the actual rate, and a shading of the rental income. Most lenders only count 80 per cent of the rent to allow for vacancy and maintenance. If the property rents for $500 per week, the lender uses $400. That shading, combined with the serviceability buffer, means you need provable income outside the rent to get the loan approved.

For self-employed landscapers, that income is assessed on your tax returns, not your bank statements. If you've claimed every deduction available and your taxable income sits at $70,000 but your business turned over $400,000, the lender uses the $70,000 figure. That's where self-employed loan structures and working with a broker who understands tradie income make a difference. Some lenders accept alternative documentation or assess on business income before deductions, but you need to know which ones and how to structure the application.

Variable Rate Discounts Depend on Loan Size and LVR

The rate you're offered on a variable investment loan isn't the advertised rate. Lenders apply discounts based on the loan amount, the loan to value ratio, and whether you're bundling other products. A $400,000 loan at 80 per cent LVR typically attracts a bigger discount than a $200,000 loan at 90 per cent LVR. The difference can be 0.3 to 0.5 per cent, which over the life of the loan is tens of thousands of dollars.

If you're borrowing above 80 per cent LVR, you'll pay Lenders Mortgage Insurance. That's a one-off cost, usually capitalised into the loan, and it's not refundable if you refinance a year later. Some lenders offer LMI waivers for certain professions, but investment loans are almost always excluded. The way around it is to wait until you've got a 20 per cent deposit, use equity from your home, or accept the LMI cost as part of getting into the market sooner.

When to Refinance a Variable Investment Loan

Refinancing makes sense when another lender offers a lower rate, when you need to access equity, or when your current lender won't adjust your loan structure. Variable loans don't have break costs, so the only expenses are application fees, valuation fees, and discharge fees from your existing lender. Most of those costs are under $1,500 total, and if the rate saving is more than 0.3 per cent, you'll recover that cost within the first year.

Investment loan refinancing also gives you a chance to restructure your debt. If you've been paying principal and interest but want to switch to interest only, or if you've got multiple loans and want to consolidate them under one lender for a better rate, refinancing is the time to do it. Lenders reassess your serviceability based on your current income and commitments, so if your taxable income has improved or you've paid off other debt, you might qualify for a higher borrowing limit or a bigger discount than you did two years ago.

Call one of our team or book an appointment at a time that works for you. We'll look at your current loan structure, your taxable income, and what you're planning next, and tell you whether refinancing makes sense or whether you're already on the right rate.

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