The Easiest Way to Finance an Investment Property

An investment loan is structured differently to an owner-occupier home loan.

Lenders assess your income, existing debts and the rental income the property will generate. They apply stricter serviceability buffers and require evidence that you can service the loan even during vacancy periods. The deposit requirement is typically higher, and the interest rate reflects the additional risk lenders assign to investor borrowing.

How Lenders Assess Your Investment Loan Application

Lenders calculate serviceability by adding a 3.0 percentage point buffer to the loan product rate. They also discount the rental income you declare, usually by 20 per cent, to account for vacancy and maintenance costs. This means a property generating $2,400 per month in rent will be assessed at $1,920 per month.

Consider a buyer with a gross salary of $110,000 and existing personal debts of $800 per month. The lender will apply the serviceability buffer to the proposed investment loan, add the existing debt commitments, and assess whether the borrower can meet all obligations using their salary and the discounted rental income. If the borrower is seeking a loan amount that pushes their debt-to-income ratio above six times their gross income, the application may fall within the 20 per cent DTI lending limit introduced in February this year, which means fewer lenders will be willing to approve the loan without compensating factors such as a larger deposit or additional security.

Most investment loans require a deposit of at least 20 per cent of the property value to avoid Lenders Mortgage Insurance. Where the deposit is below 20 per cent, LMI premiums are calculated on a sliding scale and can add several thousand dollars to your upfront costs. Some lenders will lend up to 90 per cent or even 95 per cent of the property value to investors, but the pool of willing lenders narrows significantly above 80 per cent, particularly where the borrower has other investment properties or limited rental income history.

Interest Only or Principal and Interest Repayments

Interest-only repayments reduce your monthly outgoings and maximise your cash flow during the loan term. Most lenders offer interest-only periods of one to five years on investment loans, after which the loan reverts to principal and interest unless you request an extension.

The benefit is that you preserve capital for other investments or offset the cost of holding the property while building equity through capital growth rather than loan repayment. The downside is that your loan balance does not reduce, and when the interest-only period ends, your repayments will increase as you begin paying down the principal over the remaining loan term.

In our experience, buyers who intend to hold the property for capital growth rather than immediate income often choose interest-only repayments. Those who prefer a more conservative approach or who are concerned about rate rises during the loan term tend to select principal and interest from the outset. Neither option is universally preferred. The choice depends on your broader property investment strategy and your tolerance for cash flow volatility.

Variable or Fixed Rate Investment Loans

Variable rate investment loans allow you to make extra repayments without penalty and give you access to offset accounts, which can reduce the interest charged on your loan. Fixed rate loans lock in your rate for a set period, typically one to five years, but generally restrict extra repayments and do not offer offset functionality.

Most investors select a variable rate for flexibility or split their loan between fixed and variable portions. A split structure allows you to lock in part of your rate while retaining the ability to make extra repayments on the variable portion. Switching from a fixed rate to a variable rate before the fixed term expires usually incurs break costs, which can be substantial if rates have fallen since you fixed.

If you are considering refinancing an existing investment loan, compare the rate discount you are currently receiving with the discounts available in the market. Many investors remain on higher rates than necessary because they have not reviewed their loan structure since settlement.

Negative Gearing and Tax Deductions for Properties Held Before May 2026

If you purchased your investment property before 12 May 2026, or if the property was under contract awaiting settlement at that date, you can continue to deduct all interest and holding costs against your total income, including salary and wages. This treatment applies for as long as you hold the property.

Negative gearing occurs when the costs of holding the property, including loan interest, council rates, insurance, property management fees and repairs, exceed the rental income you receive. The net loss reduces your taxable income and results in a lower tax liability or a larger refund at the end of the financial year.

Consider an investor with a loan amount of $600,000 at a variable interest rate. Annual interest might amount to $30,000, with additional holding costs of $8,000. If the property generates $28,000 in rental income, the investor records a loss of $10,000, which is deducted from their salary income. For a taxpayer in the 37 per cent marginal tax bracket, that deduction reduces their tax bill by $3,700.

Properties classified as eligible new builds, including dwellings constructed on vacant land or properties where the number of dwellings increases, retain full negative gearing benefits regardless of purchase date. Knock-down rebuilds that do not increase dwelling numbers do not qualify for the exemption.

Negative Gearing Rules for Properties Purchased After May 2026

From the 2027-28 income year, losses on established residential investment properties purchased after 12 May 2026 can only be offset against income from other residential properties, including rental income and capital gains. Excess losses can be carried forward to future years.

This means that if you purchase an established investment property now, you can deduct interest and holding costs against your salary or other income until 30 June 2027. From 1 July 2027 onward, losses must be quarantined and can only reduce income or gains from residential property sources.

In practical terms, an investor who purchases an established property in Melbourne with a loan amount generating $25,000 in annual interest and receives $22,000 in rental income will record a $3,000 loss each year once other costs are included. Under the new rules, that $3,000 loss cannot reduce the investor's wage income but can reduce a capital gain when the property is eventually sold, or offset rental profits from other residential properties held at the same time.

Capital Gains Tax Changes From July 2027

Capital gains on residential investment properties continue to be taxed under current rules until 1 July 2027. From that date, gains are calculated using cost base indexation rather than the 50 per cent discount.

Under the new system, you index the purchase price of your property in line with inflation and pay tax only on the real gain above inflation. A minimum tax rate of 30 per cent applies to the indexed gain, unless you receive certain government payments such as the Age Pension or JobSeeker in the year you sell.

For properties owned before 1 July 2027 and sold afterward, gains are split. The portion of the gain accruing before 1 July 2027 is taxed under the old 50 per cent discount rules. The portion accruing after that date is taxed under the indexed system. You can choose between obtaining a market valuation as at 1 July 2027 or using an ATO apportionment formula.

Eligible new builds purchased after 12 May 2026 allow you to choose between the old 50 per cent discount and the new indexed system at the time you sell, giving you the option to select whichever method results in a lower tax liability.

Loan Features That Support Portfolio Growth

Offset accounts and redraw facilities give you access to surplus funds without breaking the deductibility of your loan interest. An offset account sits alongside your loan and reduces the balance on which interest is calculated. Redraw allows you to withdraw extra repayments you have made on the loan itself.

For tax purposes, offset accounts are generally preferred because the loan balance remains unchanged and all interest continues to be deductible. If you redraw funds from the loan and use them for private purposes, that portion of the loan is no longer deductible.

Many investment loan products also allow you to use equity in your existing property as security for a subsequent purchase. Lenders will typically lend up to 80 per cent of the combined value of your properties without requiring LMI, provided your income supports the total debt. Using equity allows you to purchase additional properties without selling your existing holdings, which can accelerate portfolio growth if your serviceability permits.

When selecting a lender, compare not only the interest rate but also the loan features, annual fees, and the lender's willingness to provide future top-ups or additional lending as your portfolio expands. Some lenders cap the number of investment properties they will finance for a single borrower, while others have no formal limit but apply stricter serviceability criteria as your exposure increases.

Call one of our team or book an appointment at a time that works for you. We access investment loan options from banks and lenders across Australia and structure your application to reflect your broader property investment strategy and long-term goals.

Frequently Asked Questions