Investment Loans: Everything You Need to Know for Property

What Is an Investment Loan and How Does It Differ from a Home Loan?

An investment loan is a mortgage used to purchase property you intend to rent out rather than live in. Lenders classify investment loans differently to owner-occupier home loans, which affects both pricing and serviceability. The distinction matters because banks apply different risk settings to investor lending, including stricter assessment buffers and different capital requirements under prudential rules.

Consider a buyer purchasing a two-bedroom apartment in East Melbourne near Fitzroy Gardens. If they intend to live in the property, the loan is assessed as owner-occupied. If they plan to lease it and continue renting elsewhere, it becomes an investment loan. The rental income can support serviceability, but the lender will discount that income and apply a higher assessment rate. The apartment's proximity to the CBD and strong rental demand in East Melbourne's heritage precinct may influence yield assumptions, but the loan structure remains distinct from owner-occupier finance.

Investment loans typically carry a slightly higher interest rate compared to owner-occupier products. The difference reflects the lender's view that investors are more likely to walk away from a property under financial stress than someone living in it. Variable rates on investment loans can be 0.20 to 0.50 percentage points higher than equivalent owner-occupier rates, depending on the lender and loan features. Fixed rates for investors are also priced above owner-occupier fixed products.

How Lenders Assess Borrowing Capacity for Investment Property

Lenders calculate your borrowing capacity by assessing whether you can service both the new investment loan and your existing debts at a rate well above the actual loan rate. APRA requires all authorised deposit-taking institutions to assess new borrowers at an interest rate that is at least 3.0 percentage points above the loan product rate. This buffer has been in place since October 2021 and applies to all new lending, including investment loans.

Rental income is included in the serviceability calculation, but lenders typically apply a discount of 20 per cent to account for vacancy and maintenance costs. If a property in East Melbourne generates $650 per week in rent, the lender will count $520 per week as usable income in the assessment. Some lenders apply an 80 per cent shading factor, while others use a flat percentage or a combination of shading and vacancy assumptions. The treatment varies between institutions and can affect how much you can borrow.

APRA activated a debt-to-income lending limit on 27 November 2025, effective from 1 February 2026. Each lender may now extend up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. If your total borrowing exceeds six times your annual income, you may still be approved, but you fall within a limited segment of each lender's portfolio. This limit applies separately to investor and owner-occupier lending and affects new lending only.

Interest Only or Principal and Interest: Which Repayment Structure Suits Investors?

Interest-only repayments allow you to pay only the interest portion of the loan for a set period, usually one to five years. Principal and interest repayments require you to pay down both the interest and the loan balance from the outset. Both structures are available for investment loans, and each has a different financial profile.

Interest-only repayments reduce your monthly outgoings during the interest-only period, which can improve cash flow and increase the amount you can borrow. The downside is that you do not reduce the loan balance, and when the interest-only period ends, repayments increase as you begin paying down principal. Under APS 112, a long-term interest-only residential loan is classified as non-standard where the LVR is greater than 80 per cent and the contractual interest-only period is greater than five years or is not specified. Non-standard loans attract higher capital requirements for the lender, which can affect pricing and availability.

In our experience, investors who plan to hold property long-term often prefer principal and interest repayments to build equity and reduce debt over time. Investors focused on cash flow or those holding multiple properties may opt for interest-only to maximise liquidity. The choice depends on your strategy, risk tolerance, and whether you plan to use future equity for portfolio growth.

What Deposit Do You Need and How Does LVR Affect Investment Loans?

Most lenders require a minimum deposit of 20 per cent for an investment property to avoid Lenders Mortgage Insurance. LMI is generally required by ADIs on residential loans where the LVR exceeds 80 per cent. The premium is calculated on a sliding scale based on the loan amount and LVR, and the borrower pays it as a one-off cost, either upfront or capitalised into the loan.

If you purchase with a deposit below 20 per cent, you can still proceed, but the cost of LMI increases as your deposit decreases. At 90 per cent LVR, LMI on an investment loan is typically higher than on an owner-occupier loan at the same LVR, reflecting the lender's additional risk. Some lenders cap investor LVR at 90 per cent. Others may lend at 95 per cent LVR for investment purposes in limited circumstances, though this is less common.

You can also use equity in an existing property as your deposit. Where multiple loans are secured over the same property in sequential ranking order with no intermediate interest from another lender, the loan amounts are aggregated and treated as a single exposure for the purpose of calculating the LVR. If you hold a property in East Melbourne with $200,000 in available equity and use that equity as security for a new investment loan, the lender will assess the combined LVR across both the existing loan and the new borrowing when determining capital requirements and whether LMI applies.

How Do Tax Deductions Work for Investment Property Borrowing?

Interest on borrowings used to acquire or hold residential rental property is deductible against assessable income to the extent the property is rented or held to produce assessable income. This means you can claim the interest on your investment loan, along with other holding costs such as council rates, insurance, property management fees, repairs, and depreciation, against your rental income and other assessable income.

Losses from residential investment properties held at 7:30pm AEST on 12 May 2026, including properties under contract awaiting settlement at that time, continue to be fully deductible against other income, including salary and wages, until the property is sold. This grandfathering provision preserves the existing negative gearing treatment for properties already owned or under contract at that date.

From the 2027-28 income year, losses related to established residential investment properties acquired after 7:30pm AEST on 12 May 2026 are deductible only against other income from residential properties, including capital gains on residential properties. Excess losses can be carried forward to offset residential property income in future years. If you acquire an established apartment in East Melbourne after that date, and your deductible expenses exceed your rental income, the loss can only be offset against other residential property income, not against your salary.

Eligible new builds include dwellings constructed on previously vacant land and dwellings replacing existing properties where the number of dwellings increases. New builds purchased after 12 May 2026 retain full negative gearing treatment. Knock-down rebuilds that do not increase dwelling numbers, and substantial renovations, are not eligible for the exemption.

Capital Gains Tax and the Change to Indexation from 1 July 2027

The 50 per cent CGT discount continues to apply to capital gains accruing on all residential property, including investment properties, up until 1 July 2027, for individuals, trusts and partnerships who have held the asset for more than 12 months. For gains accruing from 1 July 2027, the treatment changes.

From 1 July 2027, the 50 per cent CGT discount for individuals, trusts and partnerships on affected assets is replaced by cost base indexation using CPI and a 30 per cent minimum tax rate on real capital gains accruing from that date. Investors index the cost base of their assets in line with inflation and pay tax on above-inflation profits only. For assets owned before 1 July 2027 and sold after that date, gains are taxed under the current rules for the portion accruing before 1 July 2027 and under the new rules for the portion accruing after that date.

If you purchase an investment property in East Melbourne before 1 July 2027 and sell it years later, you will need to apportion the gain between the pre-1 July 2027 period and the post-1 July 2027 period. Taxpayers may either obtain a market valuation as at 1 July 2027 or apply an ATO-published apportionment formula. For investors in eligible new build residential properties, both the existing 50 per cent CGT discount and the new indexation and 30 per cent minimum tax arrangements are available as a choice at the time of disposal.

Variable or Fixed Rate: Which Option Suits Property Investors?

Variable rates move with the market and give you flexibility to make additional repayments or refinance without break costs. Fixed rates lock in your repayment for a set term, typically one to five years, and provide certainty during that period. Both options are available for investment loans, and some lenders allow you to split your loan between variable and fixed.

Variable rates on investment loans are generally higher than owner-occupier variable rates, but they allow you to take advantage of rate cuts when they occur and to access offset accounts or redraw facilities. Fixed rates provide certainty, which can help with budgeting and cash flow forecasting, but they restrict your ability to make extra repayments above a threshold and carry break costs if you exit early.

In a rising rate environment, fixing can protect you from further increases. In a falling rate environment, you may end up paying more than the prevailing variable rate. If you hold multiple investment properties or plan to sell or refinance within a few years, a variable rate or a short fixed term may offer more flexibility. If you prefer stable repayments and do not plan to make additional payments, a longer fixed term may suit.

What Costs Should You Budget for Beyond the Loan Itself?

Stamp duty is a significant upfront cost when purchasing investment property. The rate varies by state, and in Victoria, investors pay a higher rate of stamp duty than owner-occupiers. There is no stamp duty concession for investment purchases in Victoria, regardless of property value or buyer circumstances.

Lenders Mortgage Insurance, if applicable, is another upfront cost. It is calculated based on your LVR and loan amount and can add several thousand dollars to your purchase. Legal fees, building and pest inspections, lender application fees, and valuation fees also form part of the upfront outlay. Ongoing costs include council rates, water rates, insurance, property management fees, body corporate fees if the property is in a strata scheme, and maintenance.

Rental vacancy is a cost that borrowers sometimes underestimate. Even in high-demand areas like East Melbourne, where proximity to the CBD, Fitzroy Gardens, and the sports precinct supports consistent rental demand, you should budget for occasional vacancy between tenancies. Most lenders assume a vacancy rate when shading rental income, and you should do the same when forecasting cash flow.

When Should You Consider Refinancing an Investment Loan?

Refinancing an investment loan can reduce your interest rate, access equity for further investment, or switch loan features to align with a changed strategy. Lenders regularly adjust their pricing, and a loan that was competitive two years ago may no longer be. Rate discounts are often deeper for new customers than for existing borrowers, and refinancing can capture that difference.

If you have paid down your loan or your property has increased in value, you may have equity available to use as a deposit on another investment property. Refinancing allows you to access that equity without selling. You can also refinance to switch from interest-only to principal and interest, or the reverse, depending on your current priorities.

Before refinancing, check whether your current loan carries exit fees or break costs. Fixed rate break costs can be substantial if you exit mid-term in a falling rate environment. Variable loans typically carry lower or no exit fees, though some lenders impose a discharge fee. A loan health check can identify whether refinancing delivers a net benefit after accounting for all costs.

Should You Use Equity or Cash as Your Deposit?

Using equity from an existing property allows you to retain cash for other purposes, such as covering holding costs, managing cash flow, or funding future investments. The downside is that you increase your total borrowing and the amount of interest you pay over time. Using cash reduces your loan amount and your ongoing repayments but depletes your liquidity.

Consider a scenario where you own a property in East Melbourne with available equity and wish to purchase a second investment property. You could use that equity as security and borrow the full purchase price plus costs, keeping your cash reserves intact. Alternatively, you could use cash for the deposit and borrow less, reducing your total debt but limiting your ability to respond to unexpected costs or opportunities.

The decision depends on your cash flow, risk tolerance, and investment strategy. Investors focused on portfolio growth often favour using equity to preserve cash and maximise leverage. Investors focused on reducing debt and risk may prefer to use cash and borrow less. Both approaches are common, and neither is inherently superior. The right choice depends on your circumstances and objectives.

Call one of our team or book an appointment at a time that works for you to discuss your investment loan options and work through what structure suits your situation.

Frequently Asked Questions