Understanding Variable Rate Investment Loans
When buying an investment property, one of the most significant decisions you'll face is choosing between variable and fixed interest rates. Variable rate investment loans offer flexibility that many property investors find valuable, but understanding the associated fees and costs is crucial for your property investment strategy.
A variable interest rate means your investment loan interest rate can move up or down based on market conditions and lender decisions. While this creates some uncertainty around calculating investment loan repayments, it also provides opportunities to benefit from rate decreases and access features that may not be available with fixed rate products.
Common Fees Associated with Variable Rate Investment Loans
Variable rate investment loan products come with various fees that can impact your overall borrowing costs. Here are the primary fees Melbourne property investors should be aware of:
Application and Establishment Fees
When submitting your investment loan application, lenders typically charge fees to process and assess your application. These can range from $300 to $1,000 depending on the lender and loan amount. Some lenders may waive these fees as part of promotional offers or to secure your business.
Ongoing Monthly or Annual Fees
Many variable rate investment loan options include monthly or annual account-keeping fees, typically ranging from $10 to $30 per month. While these might seem modest, they add up over the life of your rental property loan and should factor into your investment property finance calculations.
Valuation Fees
Lenders require a professional property valuation to determine the loan to value ratio (LVR) and assess risk. Valuation fees usually cost between $200 and $600, depending on the property's location and complexity. Melbourne properties may incur different valuation costs based on the suburb and property type.
Lenders Mortgage Insurance (LMI)
If your investor deposit is less than 20% of the property value, you'll likely need to pay Lenders Mortgage Insurance (LMI). This protects the lender if you default on the loan. LMI can cost thousands of dollars and is calculated based on your loan amount and LVR. The higher your investor borrowing relative to the property value, the higher the LMI premium.
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Variable Rate Investment Loan Features and Associated Costs
One advantage of variable rate products is the investment loan features they offer. However, some of these features may come with additional fees:
Offset Accounts
Many variable rate investment loans include offset account facilities, which can reduce the interest charged on your loan. While some lenders include this feature at no extra cost, others may charge annual fees ranging from $150 to $395.
Redraw Facilities
The ability to access additional repayments through a redraw facility is common with variable rate loans. Some lenders offer unlimited free redraws, while others charge $10 to $50 per transaction.
Split Loan Options
Property investors often split their investment loan between variable and fixed portions to balance flexibility and certainty. Setting up a split loan may incur additional fees, typically $100 to $300 per split.
Interest Only Investment Options
Many property investors choose interest only investment structures to maximise tax deductions and manage cash flow. With interest only repayments, you only pay the interest component for a set period (typically 1-5 years), which can improve short-term cash flow and allow you to leverage equity more effectively.
While interest only periods don't usually incur separate fees, they do result in higher overall interest costs compared to principal and interest repayments over the full loan term. The investment loan benefits of improved cash flow must be weighed against long-term costs.
Less Common But Important Fees
Discharge Fees
If you decide to refinance your investment loan or sell the property, lenders charge discharge fees to close your loan account. These typically range from $150 to $400.
Switching Fees
Changing from variable to fixed rate (or vice versa) may incur switching fees of $300 to $600. This is important to consider if your property investment strategy might change.
Break Costs
While primarily associated with fixed rate loans, some variable rate products with rate discounts or special conditions may include break costs if you refinance or repay early.
Maximising Tax Deductions Through Fee Management
One of the investment loan benefits for Melbourne property investors is that many fees are claimable expenses for tax purposes. Working with your accountant to maximise tax deductions can offset some of the costs associated with your investment property loan.
Fees that are typically tax-deductible include:
- Loan establishment fees (claimed over five years or the loan term, whichever is shorter)
- Valuation fees
- Ongoing account-keeping fees
- LMI premiums (claimed over five years or the loan term)
Understanding these tax benefits helps you accurately calculate the true cost of your investor borrowing and supports your overall strategy for building wealth through property.
Accessing Investment Loan Options Across Australia
Melbourne property investors can access investment loan options from banks and lenders across Australia through experienced mortgage brokers like OVM Finance Group. Different lenders offer varying fee structures, investor interest rates, and investment loan features, making it valuable to compare multiple investment loan products.
A professional broker can help you understand which fees are negotiable and identify lenders offering rate discounts or fee waivers that align with your property investment strategy.
Making Informed Decisions About Variable Rate Costs
When evaluating variable rate investment loans, don't focus solely on the investment loan interest rate. The total fee structure significantly impacts your overall borrowing costs and potential for portfolio growth.
Consider these factors:
- Your investment timeframe and whether you plan to hold or sell
- The flexibility you need for accessing equity or making additional repayments
- Whether you need rental income to service the loan or can leverage other income sources
- Your long-term goals for financial freedom through property investment
- How fees impact your ability to claim deductions and benefit from negative gearing benefits
Variable rate investment loans offer flexibility and features that support active property investors looking to build wealth through strategic borrowing. Understanding all associated fees and costs ensures you make informed decisions that align with your investment objectives.
Our team at OVM Finance Group specialises in helping Melbourne property investors access suitable investment property finance solutions. We can help you compare investment loan products, understand fee structures, and identify opportunities to optimise your borrowing strategy.
Call one of our team or book an appointment at a time that works for you to discuss your investment loan options and create a tailored solution for your property investment goals.