The Smart Way to Use Extra Repayments on Investment Loans

When you're buying an investment property, understanding your investment loan options can make a significant difference to your property investment strategy and financial freedom goals. One question that comes up time and again with property investors is whether making extra repayments on a variable rate investment loan is actually the right move.

Let's break down what you need to know about investment loan features, variable interest rates, and how extra repayments might affect your tax benefits and portfolio growth.

Understanding Variable Rate Investment Loans

A variable rate investment loan means your interest rate can move up or down based on market conditions and lender decisions. Unlike a fixed interest rate that stays the same for a set period, variable rates offer flexibility that many property investors find valuable.

With variable rate loans, you typically get access to features that aren't available with fixed rate products:

• Redraw facilities that let you access extra repayments you've made
• Offset accounts to reduce interest charges
• The ability to make additional repayments without penalty
• More flexibility if you want to refinance or pay off the loan early

When you access investment loan options from banks and lenders across Australia, you'll notice that variable rate products often come with interest rate discounts based on your loan amount, loan to value ratio (LVR), and overall borrowing profile.

The Extra Repayments Question for Property Investors

Here's where things get interesting. While making extra repayments on your owner-occupied home loan is usually considered smart financial management, the same logic doesn't always apply to an investment property loan.

Why? It comes down to tax benefits and maximise tax deductions.

When you're calculating investment loan repayments for an interest only investment loan, the interest you pay is typically tax-deductible. This is one of the key negative gearing benefits that property investors use to build wealth. Every dollar of interest you pay can reduce your taxable income, creating passive income opportunities over time.

If you make extra repayments on a principal and interest investment loan, you're reducing the loan amount. That means less interest to claim as one of your claimable expenses come tax time. For many investors, keeping the investment loan amount higher while directing spare cash elsewhere makes more financial sense.

When Extra Repayments Might Make Sense

That said, there are situations where making extra repayments on your variable rate investment loan could work in your favour:

1. You're in a high income bracket: If you're earning substantial income and the tax benefits aren't significant enough, reducing debt might be your priority

2. You're planning to refinance: Building equity through extra repayments can improve your loan to value ratio (LVR), potentially helping you avoid Lenders Mortgage Insurance (LMI) when you leverage equity for your next purchase

3. Interest rates are rising: If investor interest rates are climbing and you want to reduce your exposure to rate increases, extra repayments can help

4. You're nearing retirement: As you approach financial freedom and retirement, reducing debt might become more important than maximising tax deductions

5. Vacancy concerns: If you're worried about vacancy rate in your area affecting rental income, having lower repayments can provide breathing room

Alternative Strategies to Consider

Instead of making extra repayments directly on your investment property loan, consider these alternatives:

Use an Offset Account: Many variable rate investment loan products offer offset accounts. Your savings sit in this account, offsetting the interest charged on your investment loan. You still get the tax deductions on the full loan amount, but pay less interest overall. It's the best of both worlds.

Pay Down Non-Deductible Debt: If you have an owner-occupied home loan or personal loans, focus extra repayments there instead. The interest on these isn't tax-deductible, so reducing this debt first often makes more financial sense.

Build Your Deposit for the Next Property: If portfolio growth is your goal, saving for the investor deposit on your next investment property might accelerate your wealth-building more than paying down existing investment property finance.

Keep Cash for Property Expenses: Investment properties come with costs - body corporate fees, maintenance, stamp duty on purchases, and periods without rental income. Having accessible cash reserves is valuable.

Investment Loan Features That Support Flexibility

When you're completing your investment loan application with Blank Financial, we'll help you understand which investment loan features align with your property investment strategy. The right investment loan products offer:

• Redraw facilities so you can access funds if needed
• Portability to move the loan to a different property
• Split loan options combining fixed rate and variable rate portions
• Interest only periods to maximise cash flow and tax benefits
• The ability to refinance without excessive break costs

These features give you control over how you manage your investor borrowing as your circumstances change.

Getting Your Investment Loan Strategy Right

Every property investor's situation is different. Your income, investment property rates, other assets, and long-term goals all play a role in determining whether extra repayments make sense for you.

That's where talking to someone who understands investment property finance becomes valuable. At Blank Financial, we work with clients in Mount Eliza and across Australia to structure rental property loans that support their goals - whether that's negative gearing benefits, building wealth property portfolios, or creating need rental income for retirement.

We can help you understand how different investment loan interest rate options affect your repayments, compare principal and interest versus interest only investment structures, and work out whether features like offset accounts or redraw facilities suit your needs.

Your property investment strategy should work with your tax position, not against it. We'll help you access investment loan options from multiple lenders to find investment loan products that give you flexibility while maximising your tax position.

Whether you're buying your first investment property or looking at an investment loan refinance for an existing portfolio, understanding how variable rates and extra repayments affect your bottom line is crucial. The right structure can mean thousands of dollars in your pocket each year through smart use of tax benefits and equity release strategies.

Call one of our team or book an appointment at a time that works for you. We'll review your situation, explain your options, and help you make informed decisions about your investment property finance.