Top Strategies to Pair Variable Rates and Offset Accounts

A variable rate investment loan paired with an offset account lets spare cash reduce the interest you pay while the loan balance stays where it is. That structure suits investors who hold cash for repairs, vacancies or the next purchase and want it working in the meantime.

AXTON Finance works with Malvern East investors and professionals who want the mechanics explained plainly before they commit. This article covers the figures, the tax position and the trade-offs.

How Does a Variable Rate Investment Loan Work?

A variable rate investment loan has an interest rate your lender can change as your contract allows, and the lender must notify you of the change, so your repayments can move up or down. The rate is usually influenced by the RBA cash rate, which is currently 4.85% p.a., but each lender sets its own pricing.

The main advantage is flexibility. Variable loans commonly allow extra repayments and offset accounts, whereas fixed components can restrict them, depending on the lender. The main risk is repayment uncertainty. If rates rise, your holding costs rise with them, and rent may not move at the same pace.

When you apply, an ADI such as a bank must test your ability to repay at a rate at least 3.0 percentage points above the loan rate. Lenders also count only a portion of expected rent, and APRA's guidance points to a minimum 20% haircut. Your borrowing capacity is therefore usually lower than a quick calculation suggests.

How an Offset Account Reduces Investment Loan Interest

An offset account is a transaction or savings account linked to your loan, and interest is charged only on the loan balance minus the offset balance. The loan amount itself does not change.

As an illustrative example at 6.75% p.a., consider an investor with a $600,000 interest-only investment loan. Interest is $40,500 a year, or $3,375 a month. The investor keeps $60,000 in the offset account for rent collection, a maintenance buffer and tax set-aside. Interest is now charged on $540,000, which comes to $36,450 a year. That is $4,050 less interest annually, and the $60,000 remains accessible.

The trade-off is that some lenders attach a package fee or a slightly different rate to loans with offset accounts, and some offsets only reduce interest in part. These terms vary by lender, so the comparison should include the full cost and not only the headline rate. Offset balances also do not reduce the loan amount when lenders calculate your loan to value ratio (LVR).

Does an Offset Account Change Your Tax Deductions?

Yes. An offset account lowers the interest charged, so the interest you can claim is lower too. Interest on borrowings used for a rented property is generally deductible, but only the interest portion of a repayment is, and never the principal.

In the example above, the investor claims less interest, yet keeps $4,050 more cash. Whether that is the right outcome depends on your tax position, so speak with your accountant before restructuring.

The use of borrowed money matters as well. Under ATO Taxation Ruling TR 2000/2, a redraw from a loan is treated as a separate borrowing, and the deduction depends on what the money is used for. Redrawing funds for a personal expense can reduce the deductible portion of the loan.

Negative gearing rules have also changed. Losses on residential properties held at 7:30pm AEST on 12 May 2026 remain deductible against other income, as do losses on eligible new builds. From the 2027-28 income year, net rental losses on established residential properties bought after that time can generally be applied only against residential property income. Your accountant can confirm how this applies to you.

Interest Only or Principal and Interest on an Investment Loan

Interest only means you pay just the interest for a set period, and principal and interest means each repayment also reduces the loan. Interest-only periods are commonly one to five years, though lenders set their own limits.

Interest only lowers early repayments, but it does not increase how much you can borrow. APRA expects lenders to assess interest-only loans on principal and interest repayments over the remaining term after the interest-only period ends. A 30-year loan with a five-year interest-only period is assessed over 25 years. The balance also stays the same during the interest-only period, so total interest charged over time can be higher than on a loan that is being paid down.

Taxwise, interest is deductible under either structure. The principal component of a principal and interest repayment is not. Our interest only calculator shows how repayments change when the loan reverts to principal and interest.

Reviewing an Existing Investment Loan With an Offset

An existing investment loan is worth reviewing if your cash sits outside the loan, your rate has not been reviewed, or your loan lacks an offset. Refinancing can add an offset account or change the rate, though it can also bring discharge, application or valuation costs, depending on the lender.

As an example, an investor holds a variable investment loan with no offset and keeps $50,000 in a separate savings account. After a review, they move to a loan with a full offset and shift the cash across. At the illustrative 6.75% p.a., interest on that $50,000 is $3,375 a year. The loan balance is unchanged, and the cash stays available. The outcome depends on the new loan's fees and rate, which is why the comparison needs to cover total cost. Our investment loan refinance page outlines how we assess this.

If you are comparing structures for a new purchase, our investment property loans page explains the products we can access across our lender panel.

Call one of our team or book an appointment at a time that works for you. We will model your loan, offset and repayments before you decide.

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