Variable Rate Investment Loans: Fees and Costs Explained

What Self-Employed Investors Need to Know About Variable Rate Loan Costs

As a self-employed property investor, you're already familiar with managing fluctuating income and planning for tax time. When it comes to buying an investment property, understanding the fees and costs associated with variable rate investment loans is just as crucial as knowing your claimable expenses and maximising tax deductions.

Variable interest rate investment loans offer flexibility that can align well with your business cashflow, but they come with various costs that affect your overall property investment strategy. Let's break down what you'll actually pay beyond the interest rate.

Upfront Costs When Applying for an Investment Loan

When you start your investment loan application, several upfront fees typically apply:

Application and Establishment Fees

Most lenders charge between $0 to $1,000 for processing your investment loan application. Some banks and lenders across Australia have removed these fees to remain competitive, while others still include them. This fee covers the administrative work of assessing your borrowing capacity and setting up your loan.

Valuation Fees

Lenders need to confirm the property's worth before approving your investment loan amount. Valuation fees typically range from $200 to $600, depending on the property location and type. If you're investing in a unit with body corporate, the valuer will consider strata reports as part of their assessment.

Lenders Mortgage Insurance (LMI)

This is often the largest upfront cost for property investors. If your loan to value ratio (LVR) exceeds 80%, you'll likely need to pay LMI. For self-employed borrowers, this can be particularly relevant as you might be borrowing more to compensate for deposit constraints.

The cost varies significantly based on your deposit amount and investment loan amount. For example, on a $500,000 investment property loan with a 10% investor deposit, LMI could cost anywhere from $15,000 to $25,000. Some lenders offer the option to capitalise this cost into your loan amount rather than paying it upfront.

Ongoing Costs of Variable Rate Investment Loans

Unlike fixed rate options where costs are more predictable, variable rate investment loans have ongoing fees that you need to factor into your cashflow planning.

Annual or Monthly Account Keeping Fees

Many variable rate investment loan products charge between $10 to $30 per month (or $120 to $360 annually) to maintain your account. While this might seem minor compared to your loan amount, over a 30-year loan term, it adds up to thousands of dollars.

Interest Rate Charges

The most significant ongoing cost is your investor interest rates. Variable interest rates fluctuate based on market conditions and lender decisions. Currently, investment property rates typically sit 0.15% to 0.50% higher than owner-occupier rates.

For self-employed borrowers, some lenders may add a slight premium to your rate or offer smaller interest rate discounts compared to PAYG employees. However, with strong financials and good rental income projections, you can often access competitive investor interest rates.

When calculating investment loan repayments, remember that interest only investment loans have different cost implications compared to principal and interest options. Interest only loans often come with slightly higher rates but offer better cashflow in the short term - something particularly valuable when managing business income alongside your property investment.

Additional Variable Rate Loan Features and Their Costs

Variable rate investment loans typically include several investment loan features, though some may come with associated costs:

Offset and Redraw Facilities

Many variable rate property investment loan products include offset accounts or redraw facilities. These are valuable for self-employed investors who might have irregular income deposits. While some lenders include these at no extra cost, others charge $10 to $20 monthly for offset accounts.

Extra Repayment Flexibility

One of the key investment loan benefits of variable rates is the ability to make additional repayments without penalty. This flexibility helps you build wealth through property by reducing your loan faster during profitable business periods.

Costs to Consider During Your Investment Journey

Switching Between Interest Only and Principal and Interest

Most lenders allow one switch without fees, but subsequent changes might cost $300 to $500. This flexibility matters when your property investment strategy evolves or your need for rental income versus equity release changes.

Investment Loan Refinance Costs

If you decide to pursue an investment loan refinance to secure better investor interest rates or access equity from portfolio growth, expect to pay:

• Discharge fees from your current lender: $150 to $400
• New application fees with the new lender
• Potential valuation fees again
• Government transfer/registration fees: varies by state

However, a loan health check might reveal that refinancing could save you thousands annually despite these upfront costs.

Tax Deductible Costs for Investment Loans

The silver lining? Most fees and costs associated with your rental property loan are claimable expenses. This includes:

• Loan establishment fees
• Annual account keeping fees
• All interest charges
• LMI (deductible over five years or the loan term, whichever is shorter)
• Valuation fees

These tax benefits form part of the broader negative gearing benefits that make property investment attractive for self-employed individuals in higher tax brackets.

Making Informed Decisions About Investment Loan Options

When you access investment loan options from banks and lenders across Australia through Shoreside Finance, we compare not just the variable interest rate, but the complete cost structure. Two loans with identical rates can have vastly different fee structures, affecting your passive income and overall returns.

For self-employed investors, understanding your borrowing capacity is crucial before comparing costs. Your business structure, tax returns, and accountant statements all influence what investment loan products you can access and at what rates.

Remember that the vacancy rate in your target area, stamp duty (which can be $20,000+ depending on the property value and state), and ongoing body corporate fees (if applicable) also impact your investment viability beyond just the loan costs.

Building Wealth Through Informed Property Investment

Variable rate investment loans offer the flexibility that self-employed investors need to align with business income patterns while building wealth through property and working towards financial freedom. However, understanding the full cost picture - from upfront fees to ongoing charges - is essential for calculating realistic investment property finance requirements.

By knowing these costs upfront, you can better leverage equity, structure your deposit effectively, and choose investment loan features that align with your unique circumstances as a self-employed property investor.

Ready to explore investment loans tailored to your self-employed situation? Call one of our team or book an appointment at a time that works for you. We'll help you access the right property investor loan structure with transparent costs and competitive investor interest rates.