Smart Ways to Approach Investment Loan Extra Repayments

If you have a variable rate investment loan, paying a little extra can cut the interest you owe, but it also ties up cash you might want for other things. The trick is knowing when it suits your plan and when it doesn't.

This one's for property investors around Mermaid Waters who already hold an investment loan, or are about to sign one, and wonder whether to throw spare cash at it.

What Is a Variable Rate Investment Loan?

A variable rate investment loan has an interest rate your lender can change over time, so your repayments can go up or down. Your lender decides when and by how much, and that usually follows wider interest rate movements.

The upside is flexibility. Many variable loans let you make extra repayments, though the terms differ by lender, so check yours before you plan around it. The downside is uncertainty. If your rate rises, your repayment rises with it, and your rental income doesn't automatically rise to match.

It also pays to remember how lenders assess investor borrowing in the first place. Banks must test new borrowers at an interest rate at least 3 percentage points above the loan rate. If you're weighing up how much you could borrow, the borrowing capacity calculator is a handy starting point.

How Extra Repayments Work on an Investment Loan

Extra repayments go straight towards your loan balance, which lowers the amount your lender charges interest on. Because interest is worked out on what you owe, a smaller balance means less interest from then on.

On a principal and interest loan, only the interest part of your repayment is tax deductible. The principal part is a repayment of capital and is not deductible. So extra repayments reduce your debt, but they also reduce the interest you can claim over time. Speak with your accountant about how this fits your tax position.

An Illustrative Example: $500,000 at 6.75%

Using an illustrative rate of 6.75% p.a., a $500,000 principal and interest loan over 30 years has a repayment of about $3,243 a month. In the first month, about $2,812 of that is interest.

Consider an investor with this loan who adds $200 a month to the repayment, taking it to $3,443. That extra $200 goes entirely to principal, so each month's interest is calculated on a slightly lower balance than it would have been.

Now say the lender lifts the rate by one percentage point to 7.75%. On the original balance and term, the minimum repayment would be about $3,582, roughly $339 a month more than before (from about $3,243). If this investor keeps paying $200 extra, their outlay rises by the same $339, to about $3,782. They would only face the smaller $139 increase if they dropped the extra repayment and paid the new minimum.

The outcome is a lower balance over time. The trade-off is that $200 a month is no longer available as cash, and a rate rise still lifts your repayments by the full amount. These figures are illustrative only. You can test your own numbers with the mortgage repayment calculator.

Offset or Redraw: Which One Keeps Your Tax Position Clear?

An offset account reduces the interest charged on your loan without changing the loan balance, while redraw lets you pull back extra repayments you've already made. Both give access to your cash.

With redraw, the ATO looks at what you use the money for. Under its ruling on redraw facilities, each redraw is treated as a separate borrowing. If you redraw to buy something personal, like a holiday or a car, the interest on that part is not deductible, even though the loan is secured by your investment property.

An offset also lowers the interest you incur, which means a lower interest deduction. That's not a bad thing, because you're paying less interest overall, but it's worth knowing. Whether an offset is full or partial, and what fees apply, depends on the lender. How withdrawals from an offset are treated should be confirmed with the ATO or your accountant for your situation.

When Extra Repayments Might Not Suit Your Property Investment Strategy

Extra repayments may not suit you if you need cash for repairs, a deposit on another purchase or a buffer for vacancies. Once money goes into a standard loan, getting it back depends on your lender offering redraw, and it may carry limits.

There's also a tax angle. For established residential properties bought after 7:30pm AEST on 12 May 2026, net rental losses can only be used against other residential property income from the 2027-28 income year. Properties held at that time, and eligible new builds, are treated differently. How this affects you depends on when you bought and what you bought, so get advice from your accountant before changing how aggressively you pay down debt.

A sensible middle ground for many investors is keeping a cash buffer in an offset account, then paying extra only once that buffer feels comfortable. If you're locked into a loan with weak features or a rate that's drifted, refinancing may be worth a look. A loan health check can show whether your current setup still fits. Refinancing can involve discharge, valuation and other fees depending on your lender, so those costs need to sit against any saving.

Setting Up Your Loan the Way You Actually Live

The right mix of variable rate, extra repayments and offset depends on your cash flow, your tax position and your plans for the next property. Our team at digilend can compare options across lenders and talk through the trade-offs on your investment loan. If you're a Mermaid Waters local, see our Mermaid Waters page for how we work with clients nearby.

Call one of our team or book an appointment at a time that works for you, and we'll work out whether extra repayments make sense for your investment loan.

Frequently Asked Questions