The Easiest Way to Structure an Investment Loan

An investment loan is a mortgage product used to purchase a property you intend to rent out rather than live in.

The structure you choose affects how much rental income you keep, how much tax you pay, and how much flexibility you have when your circumstances change. Most Victorian investors we work with focus on two things when setting up their first rental property loan: maximising the tax benefit while keeping repayments affordable during vacancy periods.

Interest Only or Principal and Interest Repayments

Interest only repayments mean you pay only the interest charged each month without reducing the loan amount. Principal and interest repayments include both interest and a portion of the loan balance.

Consider a buyer who purchases a rental property and selects a five-year interest only period. Monthly repayments are lower, which preserves cash flow and allows rental income to cover more of the loan cost. The borrower can still make extra repayments into an offset account if they choose, keeping the funds accessible while reducing interest charges. At the end of the interest only period, the loan converts to principal and interest unless renewed. This approach works when you expect income to increase over time or when you plan to use surplus cash flow to build deposits for additional properties.

Interest only periods are typically available for one to five years on investment loans. Lenders assess your ability to service the loan at the principal and interest rate even if you apply for interest only, so approval depends on your income and existing commitments.

Variable Rate or Fixed Rate Investment Loan Products

Variable rate loans allow repayments to move with market conditions. Fixed rate loans lock in a rate for a set period, usually one to five years.

If you fix your rate and the Reserve Bank reduces the cash rate, your repayments stay the same while variable rate borrowers benefit from the reduction. If rates rise, your repayments remain unchanged while variable borrowers pay more. Many investors split their loan between variable and fixed portions to balance certainty with flexibility. A variable portion allows extra repayments and access to offset accounts without restriction, while a fixed portion provides certainty for budgeting.

Rate discounts vary depending on the loan amount and the lender. Larger loans or borrowers with multiple properties may receive better pricing. Some lenders offer additional discounts when you hold transaction accounts or insurance products with them, though the value depends on your broader financial position.

Offset Accounts and Redraw Facilities on Property Investor Loans

An offset account is a transaction account linked to your loan. The balance in the offset reduces the amount of interest charged without affecting your ability to access the funds.

In a scenario where an investor holds surplus cash from rental income or personal savings, depositing that amount into a 100 per cent offset account reduces interest charges on the full loan balance. Because the funds remain accessible, the investor can withdraw money for maintenance, body corporate fees, or a deposit on a second property without reapplying for finance. This feature is particularly valuable when you plan to grow a portfolio over time and need liquid funds available quickly.

Redraw facilities allow you to withdraw extra repayments you have made above the minimum. While this sounds similar to an offset, redraw is subject to lender approval, may incur fees, and is not always available on fixed rate loans. For investment property finance, an offset account is generally the more flexible option.

Loan to Value Ratio and Lenders Mortgage Insurance

Lenders assess your deposit size as a percentage of the property value. A deposit of less than 20 per cent means your loan to value ratio exceeds 80 per cent, and most lenders require you to pay Lenders Mortgage Insurance.

LMI protects the lender if you default, not you. The premium is calculated based on the loan amount and the LVR, and can range from a few thousand dollars to tens of thousands depending on the size of the loan. You can usually add the premium to the loan amount rather than paying upfront, though this increases the total debt and the interest you pay over time. Some lenders waive LMI for certain professions or offer discounted premiums for investors with strong income and credit histories.

If you already own a home with available equity, you may be able to leverage equity from that property to fund the deposit on your investment purchase. This approach avoids LMI while allowing you to keep other savings intact for settlement costs and holding costs during vacancy periods.

Tax Deductions and Claimable Expenses on Rental Property Loans

Interest charged on an investment loan is fully deductible when the property is rented or available for rent. Other claimable expenses include property management fees, council rates, insurance, repairs, and depreciation on fixtures and fittings.

Keeping loan funds separate from personal borrowings makes it easier to claim the full interest deduction. If you refinance or withdraw equity for private purposes, that portion of the interest is no longer deductible. Borrowers planning to build wealth through property often structure their loans to preserve deductibility and maintain clear separation between investment and personal debt.

From 1 July 2027, net rental losses on most residential properties purchased after 12 May 2026 will be quarantined. Those losses can only offset other residential rental income or be carried forward, not offset against salary or wages. Properties purchased before that date, and eligible new builds, remain under existing negative gearing rules. If your purchase is affected, cash flow becomes more important because the tax benefit is delayed until you have other rental income or sell the property.

Investment Loan Application and Serviceability

Lenders assess your ability to repay the loan by calculating your income, existing debts, living expenses, and the rental income the property will generate. Rental income is usually assessed at 80 per cent of the market rent to account for vacancy and maintenance costs.

If you already have an owner-occupied mortgage, the lender includes those repayments in your serviceability calculation. High credit card limits, personal loans, or buy now pay later accounts reduce your borrowing capacity even if the balances are low. Paying down unsecured debt or reducing credit limits before applying improves your serviceability and may allow you to borrow more.

APRA requires lenders to assess your ability to service the loan at a rate 3 percentage points above the product rate. Debt to income limits also apply: lenders can fund only a limited portion of new investor loans at six times your gross income or higher. If your borrowing falls close to that threshold, structuring the loan with a longer interest only period or choosing a lender with higher DTI capacity may be necessary.

Refinancing an Investment Loan to Access Equity or Improve Rates

As your property increases in value or your loan balance reduces, you build equity. Refinancing allows you to access that equity for a deposit on a second property, or to move to a lender offering better rates or features.

Refinancing to release equity does not trigger capital gains tax because you are borrowing against the asset, not selling it. The additional funds are not considered income, though the interest on the increased loan amount is only deductible if the funds are used for investment purposes. Borrowers who withdraw equity to fund renovations on the same investment property can usually claim the interest, while those who use the funds for a holiday or personal expense cannot.

If your income has increased since your original loan was approved, or if you have paid down other debts, refinancing may allow you to access more equity than you could when you first purchased. This is a common strategy for investors building a portfolio without needing to save a new deposit from scratch each time.

Call one of our team or book an appointment at a time that works for you. We'll help you compare investment loan options from lenders across Australia and structure your loan to support your property investment strategy and financial goals.

Frequently Asked Questions