The Easiest Way to Optimise Your Investment Loan

How Investment Loan Optimisation Reduces Holding Costs

Optimising an investment loan means structuring the borrowing, repayment type, and features to minimise your after-tax cost of holding the property while maintaining flexibility for future growth. It involves choosing the right product, setting the loan amount correctly, and aligning the structure with your tax position and cash flow.

Brunswick attracts a mix of renters, from young professionals in converted warehouses near Sydney Road to students sharing renovated Edwardian homes closer to RMIT's Bundoora campus. Rental demand is solid, but vacancy periods still occur, and holding costs during those weeks matter. The way you structure your borrowing can mean the difference between weathering a vacancy comfortably and scrambling to cover repayments from your wage.

Consider an investor who purchases a two-bedroom apartment near Anstey station. They have a 20 per cent deposit and borrow the balance on a variable rate principal and interest loan at the lender's standard rate. The loan works, but it is not optimised. The repayments include principal, which reduces deductible debt faster than necessary. The rate includes no discount because the investor accepted the first offer without comparison. And the loan has no offset account, so surplus cash in a transaction account earns taxable interest instead of reducing the loan balance and the interest charged.

By switching to interest-only repayments for an initial period, negotiating a rate discount through a broker with access to investment loan options from lenders across Australia, and attaching a full offset account, the same investor reduces monthly repayments, increases deductible interest, and keeps surplus funds working to reduce the effective rate without locking them away. The loan amount stays the same, but the structure now supports both tax efficiency and liquidity.

Choosing Between Interest-Only and Principal and Interest

Interest-only repayments allow you to pay only the interest component each month, leaving the loan amount unchanged. Principal and interest repayments reduce the loan amount over time but cost more each month and reduce your tax deduction as the loan balance falls.

For most investors, interest-only makes sense during the accumulation phase. You preserve deductible debt, keep repayments lower, and redirect surplus cash toward a deposit on the next property or into an offset account. Once you begin drawing income from the portfolio or paying down debt in retirement, switching to principal and interest becomes more relevant.

Interest-only terms are typically approved for five years at a time on investment loans, after which the loan either reverts to principal and interest or you can request a further interest-only period if your circumstances support it. Lenders assess your ability to service principal and interest repayments at application, even if you select interest-only initially, so the option does not mean you are borrowing beyond your capacity.

There is no requirement to pay down an investment loan during the life of the property. Some investors hold interest-only loans for decades, refinancing as needed, and only repay the loan when they sell the property or restructure the portfolio.

Variable or Fixed Rate for Investment Property

Variable rates move with the market and allow full offset accounts, unlimited extra repayments, and penalty-free refinancing. Fixed rates lock in your rate for a set term but typically do not allow offset accounts, restrict extra repayments to a small annual limit, and impose break costs if you repay or refinance early.

For investment loans, the offset account is often worth more than rate certainty. Brunswick investors with irregular income, planned property upgrades, or plans to purchase additional properties within a few years benefit from keeping all options open. An offset account linked to a variable rate loan lets you park sale proceeds, bonuses, or tenant bonds and reduce interest without committing those funds permanently.

Fixed rates can suit investors with predictable expenses and no plans to sell or refinance during the fixed term. A split structure, where part of the loan is fixed and part remains variable with an offset, is common but adds complexity. Each split is a separate loan account with its own minimum repayment and fee schedule. In our experience, most Brunswick investors who fix a portion of their loan do so for budget certainty rather than rate advantage, and they keep at least 50 per cent variable to retain flexibility.

If you are considering a refinance within two years, avoid fixing. Break costs can exceed any rate saving, and lenders calculate them based on the difference between your fixed rate and the current wholesale rate for the remaining term.

Setting the Loan Amount to Maximise Deductibility

Borrowing the maximum amount the lender will approve is not the same as borrowing the optimal amount. The loan amount should reflect the purchase price, acquisition costs, and any immediate capital works, with all borrowing used solely for income-producing purposes.

Stamp duty, conveyancing, building and pest inspections, and lender fees can be added to the loan amount, and the interest on that portion remains deductible because the entire borrowing is used to acquire and hold the rental property. Borrowing to cover these costs, rather than paying them from savings, preserves your cash for the next deposit or for holding in an offset account where it reduces interest.

If you use part of your borrowing for private purposes, such as buying a car or paying off a credit card, that portion of the interest is not deductible. The ATO requires you to apportion interest between the income-producing and private components, and most lenders and accountants recommend splitting the loan into separate accounts at the outset to avoid later disputes.

Brunswick investors purchasing older properties often plan renovations within the first year. If the renovation adds to the property's income-producing capacity, such as adding a second bathroom or converting a sunroom to a third bedroom, the cost can be capitalised into the loan and the interest remains deductible. Cosmetic updates, such as repainting in a different colour, are generally treated as repairs and claimed as an immediate deduction rather than added to the loan. Your accountant will guide the distinction, but the key is to separate any private-use component into its own loan account from the start.

Offset Accounts and Redraw Facilities

An offset account is a transaction account linked to your loan. The balance in the offset reduces the loan balance used to calculate interest, without actually reducing the loan amount or your tax deduction. A redraw facility allows you to withdraw extra repayments you have made, but those extra repayments reduce the loan balance and therefore reduce your deductible interest.

For investment loans, an offset account is almost always preferable. It keeps your loan amount at the maximum deductible level while giving you full access to your cash. Redraw facilities can create problems if you later want to claim interest deductions, because the ATO views redrawn funds as a new borrowing and asks what you used them for.

Not all lenders offer full offset accounts on investment loans, and some charge a higher rate or annual fee for the feature. The cost is usually justified. An investor with a loan amount of $600,000 and $50,000 sitting in an offset at current variable rates will save several thousand dollars in interest each year, and that saving compounds.

Some lenders offer partial offset accounts, which reduce your interest by only a percentage of the offset balance, such as 40 per cent or 60 per cent. These are rarely worthwhile. If the lender does not offer a full 100 per cent offset, consider a different lender.

Loan to Value Ratio and Lenders Mortgage Insurance

Lenders Mortgage Insurance is charged when you borrow more than 80 per cent of the property value. The premium can be added to the loan amount, and the interest on that portion is deductible because the insurance is a cost of acquiring the loan used to purchase the income-producing property.

For investors, paying LMI to access a property sooner, rather than waiting another year to save a larger deposit, can be the right decision if rents and values are rising. The premium is a one-off cost, and the interest saving from entering the market earlier often exceeds the LMI within a few years. That calculation depends on the specific property and market, but it is worth modelling with your broker rather than assuming LMI is always something to avoid.

Keeping your loan to value ratio at or below 80 per cent also gives you access to better rates. Lenders typically reserve their sharpest pricing for loans at 80 per cent LVR or lower, and the rate jump above 80 per cent can be significant. If you are close to the threshold, a slightly larger deposit or a lower purchase price can deliver a better rate for the life of the loan.

Brunswick's median values vary by property type and proximity to transport, so a 20 per cent deposit on a unit near Anstey station will differ from a 20 per cent deposit on a house near Dunstan Reserve. Work with a broker who understands the local market and can show you how different deposit sizes affect your rate, your LMI, and your serviceability under the lender's assessment.

Structuring for Future Portfolio Growth

If you plan to acquire more than one investment property, your first loan should be structured to preserve borrowing capacity for the next purchase. That means selecting a lender that will allow you to use equity in the first property as security for the second loan, choosing a loan product that permits top-ups or further advances, and ensuring the loan amount on the first property does not limit your debt-to-income ratio when you apply for the second.

Under the debt-to-income settings introduced in February, lenders must limit the number of new investment loans above six times income. If your income is $100,000 and you borrow $650,000 on your first investment property, your DTI is already 6.5, and many lenders will not approve a second investment loan until you increase your income or reduce your debt. Structuring the first loan with a modest buffer, or planning to increase your income before the next purchase, keeps your options open.

Some investors use a line of credit or split loan structure to access equity without refinancing the entire loan. Others establish the loan with a lender that offers low-cost variation fees, so they can increase the loan amount later as the property value rises. Your mortgage broker in Brunswick can compare lenders on these features and recommend a structure that supports your timeline and goals.

Rate Discounts and How to Access Them

Investment loan rates vary by lender, loan amount, LVR, and whether you apply directly or through a broker. Published rates are almost never the best available rate. Lenders hold back discounts for borrowers who meet specific criteria, such as a loan amount above a certain threshold, a deposit of 20 per cent or more, or an application submitted through a broker with volume commitments.

A rate discount of 0.5 per cent on a $500,000 loan saves $2,500 per year in interest. Over five years, that is $12,500, and the saving is deductible, so the after-tax benefit is even larger. Accessing those discounts requires comparing offers from multiple lenders and understanding which lender is pricing competitively for your specific profile at the time you apply.

Rates change frequently, and a lender that offered the lowest rate last month may not be the lowest this month. Brokers with access to live rate sheets from 30 or 40 lenders can identify the current best option for your situation without requiring you to submit multiple applications. The application itself should only go to the lender you have chosen after comparison, not to several lenders simultaneously.

Some lenders also offer rate discounts for customers who hold other products with them, such as transaction accounts, credit cards, or offset accounts with a minimum balance. These package discounts can be valuable, but only if the package fee and product features suit your needs. A $400 annual package fee that delivers a 0.15 per cent rate discount is only worthwhile on a loan above $250,000.

Call one of our team or book an appointment at a time that works for you to review your current loan structure, compare your rate against current offers, and identify whether refinancing or restructuring will reduce your holding costs and support your next purchase.

Frequently Asked Questions