Unlock the secrets to extra repayments on variable rate investment loans

Variable rate investment loans let you make extra repayments without penalty, but whether you should depends on how those payments affect your tax position and borrowing capacity.

Most enrolled nurses buying an investment property choose a variable rate for the flexibility it offers, particularly the ability to make additional repayments when cashflow allows. But that flexibility only works in your favour if you understand how those extra payments interact with your tax deductions, how they affect access to funds later, and whether the strategy fits your actual financial position. Paying down an investment loan faster sounds sensible until you realise it can reduce your claimable interest and tie up capital you might need elsewhere.

How Extra Repayments Affect Your Tax Deductions

Every dollar you pay above the minimum reduces your loan balance, which reduces the interest you pay and therefore the amount you can claim as a tax deduction. If you make extra repayments on an investment property loan, your taxable income increases because your deductible interest expense has fallen. Consider a scenario where you have a variable rate investment loan with a balance of $450,000 at a variable interest rate. If you make $10,000 in additional repayments, your interest bill drops by roughly $600 to $700 over the following year, depending on the rate. That reduction in interest means $600 to $700 less in tax deductions, which translates to around $180 to $300 in additional tax payable if you're on a marginal rate around 32.5% to 37%.

This doesn't mean extra repayments are always the wrong move. It means the benefit of paying down the loan faster needs to outweigh the cost of losing those deductions. For enrolled nurses with multiple income sources or those planning to build a portfolio, keeping the investment loan balance higher and redirecting surplus income toward an offset account on your owner-occupied home loan often delivers a stronger overall outcome.

Redraw Facilities and How They Work on Investment Loans

A redraw facility lets you access any extra repayments you've made above the scheduled minimum. If you've paid an extra $15,000 over two years, you can usually withdraw that amount, subject to the lender's redraw conditions. Some lenders allow unlimited free redraws. Others impose minimum withdrawal amounts, processing fees, or delays. Some restrict redraw entirely if the loan is interest-only.

The issue with redraw on an investment loan is tax treatment. If you withdraw those funds and use them for a non-investment purpose, such as renovating your home or taking a holiday, the interest on that portion of the loan is no longer tax-deductible. The Australian Taxation Office applies a strict purpose test. Interest is only deductible to the extent the borrowed funds are used to generate assessable income. Once you redraw and spend the money on something personal, you've broken that link. In a scenario where you redraw $20,000 from your investment loan and use it to upgrade your kitchen, the interest on that $20,000 is no longer claimable, even though the property remains an investment. You're left with a blended loan where part of the interest is deductible and part isn't, which complicates your tax return and reduces your overall deduction.

For this reason, many enrolled nurses with investment properties avoid making extra repayments on the investment loan altogether. Instead, they direct surplus cashflow toward a loan that doesn't offer tax deductions, such as their owner-occupied mortgage, or into an offset account linked to that loan. The distinction matters because offset accounts don't reduce your loan balance. They sit separately and reduce the interest charged, which means your loan balance stays intact and your full interest deduction is preserved.

Variable Rate Loans and Interest-Only Periods

Most variable rate investment loans offer the option to structure repayments as interest-only for a set period, typically five years. During that time, you're not required to pay down any principal. Your repayments cover interest alone, which keeps your cashflow lower and your tax deductions higher. Making extra repayments during an interest-only period is allowed on most variable products, but it's rarely the right move unless you're planning to switch back to principal and interest soon and want to reduce the balance before that happens.

If you're an enrolled nurse holding an investment property and managing both an owner-occupied home loan and an investment loan, the priority is usually to pay down the non-deductible debt while keeping the investment loan balance as high as the property's income and capital growth can justify. Interest-only periods are useful for that strategy because they give you breathing room to focus surplus income where it has the most impact. Once the interest-only period ends, the loan reverts to principal and interest, and your repayments increase. You can often extend the interest-only period, refinance, or let it roll over, depending on your lender and your equity position at the time.

When Extra Repayments Make Sense

There are situations where paying down an investment loan does make sense, even with the tax trade-off. If you're planning to sell the property within a few years and want to reduce your debt before settlement, extra repayments lower your balance and reduce the risk of a shortfall. If you're approaching retirement and want to reduce overall debt, paying down the investment loan can make your income needs more predictable. If rental income is covering most of your repayments and you have surplus cashflow with no better use for it, directing that surplus toward the investment loan can work, particularly if you don't have an owner-occupied mortgage to prioritise.

But for most enrolled nurses building wealth through property, the better approach is to preserve the deductibility of the investment loan and focus on reducing non-deductible debt. If you do make extra repayments, confirm with your lender that the product includes a redraw facility with no restrictions, and avoid withdrawing those funds for personal use. If you need access to capital later, consider refinancing the investment loan or using equity rather than relying on redraw, which keeps the tax treatment clear and avoids blended loan issues.

Offset Accounts on Investment Loans

Some variable rate investment loans offer an offset account, though they're less common on investor products than on owner-occupied loans. An offset account works the same way regardless of loan type. The balance in the account reduces the interest charged on the loan without reducing the loan balance itself. If your investment loan is $400,000 and you have $30,000 in an offset account, you only pay interest on $370,000.

The difference with an investment loan is that reducing your interest reduces your tax deduction. An offset account on an investment loan delivers the same result as making extra repayments, except the funds remain accessible. You're still reducing your claimable interest, so the tax impact is the same. The advantage is liquidity. If you need the $30,000 for another purpose, you withdraw it from the offset account without touching the loan structure or creating a tax issue.

For enrolled nurses who want the option to access funds without redraw complications, an offset-enabled investment loan can work, but you need to weigh the reduction in deductions against the benefit of having liquid savings. In many cases, holding that $30,000 in an offset account linked to your owner-occupied home loan delivers a stronger outcome because you're reducing non-deductible interest and preserving the full deduction on your investment loan.

Refinancing to Access Equity Without Breaking Deductibility

If you've built equity in your investment property and need access to funds, refinancing to release that equity is usually cleaner than relying on redraw. When you refinance, you can increase the loan amount and use the additional borrowing for another investment purpose, such as a deposit on a second property or renovations to the existing investment. As long as the borrowed funds are used for an income-producing purpose, the interest remains fully deductible.

Refinancing also gives you the opportunity to review your rate, compare lenders, and potentially move to a product with lower fees or different features. Enrolled nurses with investment properties often refinance every few years to stay on a competitive rate and access equity as the property appreciates. The key is to document the purpose of any additional borrowing and keep those funds separate from personal expenses. If you borrow an extra $50,000 through a refinance and use $40,000 for a second property deposit and $10,000 for a holiday, only the interest on the $40,000 is deductible. Keeping the loans separate avoids that issue entirely.

Call one of our team or book an appointment at a time that works for you. We'll review your current investment loan structure, explain how extra repayments and redraw affect your tax position, and help you build a strategy that fits your income, your goals, and your plans for expanding your property portfolio.

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