When buying an investment property, choosing the right investment loan product is just as important as selecting the property itself. Variable rate loans remain a popular choice among property investors, offering flexibility that can support your property investment strategy. However, understanding the fees and costs associated with these investment loan options is crucial for maximising tax deductions and building wealth through property.
At New Wave Property Finance, we help investors access investment loan options from banks and lenders across Australia, ensuring you understand every aspect of your investment property finance before committing.
What Are Variable Rate Investment Loans?
A variable interest rate loan means your interest rate can move up or down throughout the life of your loan. Unlike a fixed interest rate, which remains unchanged for a set period, variable rates fluctuate based on market conditions and lender decisions. This flexibility comes with specific investment loan features that can benefit property investors seeking to build wealth.
Variable rate investment loans typically offer:
- Offset account options to reduce interest payments
- Redraw facilities for accessing additional repayments
- The ability to make extra repayments without penalties
- Flexibility to switch between interest only and principal and interest repayments
- Potential interest rate discounts based on your loan amount and deposit
Understanding Investment Loan Fees
When calculating investment loan repayments, you need to factor in more than just the investor interest rates. Several fees can impact your investment loan amount and overall borrowing costs:
Application Fees
Most lenders charge an application fee when you submit your investment loan application. This fee typically ranges from $300 to $600, though some lenders waive this charge. These costs are often claimable expenses for tax purposes, so keep detailed records.
Ongoing Monthly Fees
Many investment loan products include monthly account-keeping fees, usually between $10 and $15 per month. While this might seem minor, over a 30-year loan term, these fees add up considerably.
Valuation Fees
Lenders require a professional property valuation to determine your loan to value ratio (LVR). Valuation fees generally range from $200 to $400, depending on the property location and type. For properties with body corporate arrangements, additional documentation may be required.
Settlement Fees
Settlement or establishment fees cover the administrative costs of setting up your rental property loan. These typically range from $200 to $800 and are separate from your solicitor or conveyancer fees.
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Lenders Mortgage Insurance (LMI)
One of the most significant costs for property investors is Lenders Mortgage Insurance. When your investor deposit is less than 20% of the property value (meaning your LVR exceeds 80%), lenders typically require LMI to protect themselves against potential default.
LMI costs vary based on your loan amount and LVR but can range from a few thousand to tens of thousands of dollars. For example, on an $800,000 investment loan with a 10% deposit, LMI could cost between $20,000 and $30,000.
While LMI represents a substantial upfront cost, it allows you to enter the property market with a smaller investor deposit, potentially accelerating your portfolio growth. The premium is often capitalised into your loan amount, and the cost is typically tax-deductible.
Ongoing Costs and Variables
Beyond establishment fees, variable rate loans involve ongoing considerations that affect your investment property rates:
Rate Discount Negotiations
Your initial variable interest rate often includes a rate discount off the lender's standard variable rate. This discount might range from 0.5% to 1.5%, depending on factors including:
- Your investor borrowing amount
- Your LVR
- Your overall relationship with the lender
- Current market conditions
As your circumstances change or when conducting an investment loan refinance, you may negotiate better investor interest rates.
Interest Only vs Principal and Interest
Many property investors choose interest only investment loans to maximise their negative gearing benefits and cash flow. However, interest only periods typically attract slightly higher interest rates than principal and interest loans - usually 0.1% to 0.3% higher.
Interest only repayments mean your loan amount doesn't reduce during the interest only period, but this structure can help you leverage equity for expanding your property portfolio while maximising tax deductions.
Additional Costs to Consider
When planning your property investment strategy, factor in these additional expenses:
Stamp Duty
Stamp duty is a state government tax on property purchases. Rates vary by state and property value, but investors don't receive the concessions available to first home buyers. In New South Wales, for instance, stamp duty on a $700,000 investment property would be approximately $26,000.
Vacancy Rate Provisions
While you need rental income to service your loan, periods without tenants are inevitable. Set aside reserves to cover costs during vacancy periods, typically calculated at 2-4 weeks per year.
Ongoing Property Expenses
Remember that claimable expenses extend beyond your loan interest. Council rates, property management fees, insurance, maintenance, and repairs all impact your cash flow, though these costs provide tax benefits through deductions.
The Value of Professional Guidance
Understanding the complete fee structure of investment loan products helps you make informed decisions about your investor borrowing capacity. Different lenders offer varying investment loan benefits, and comparing these options requires expertise and market knowledge.
A specialist mortgage broker can help you:
- Compare investment loan options across multiple lenders
- Identify opportunities for equity release from existing properties
- Structure your loans to maximise passive income and tax benefits
- Plan for long-term portfolio growth and financial freedom
- Calculate the true cost of different investment loan features
Variable rate loans offer flexibility that supports active property investment strategies. Whether you're buying your first investment property or managing an established portfolio, understanding fees and costs ensures you can accurately project returns and build wealth effectively.
The team at New Wave Property Finance specialises in investment property finance, helping investors access suitable investment loan products while minimising unnecessary costs. We work with you to understand your property investment strategy and structure loans that support your long-term financial growth objectives.
Call one of our team or book an appointment at a time that works for you to discuss your investment loan options and how we can help you achieve your property investment goals.
