Everything You Need to Know About Investment Property Loans

Buying an investment property changes how lenders assess your application.

Purchasing an investment property involves different lending criteria than a home loan, different tax treatment, and a different approach to structuring your debt. Lenders calculate your borrowing capacity based on rental income and apply higher serviceability buffers than they do for owner-occupiers. The loan amount you can access depends on how much of the expected rent they're willing to recognise and how your existing debt sits against your income.

In Dromana, where rental vacancy rates have stayed below 2 per cent through winter and demand from holiday tenants continues year-round, investors are returning to the market after sitting on the sidelines during the rate rises. The introduction of negative gearing restrictions from July 2027 has shifted attention toward new builds and existing properties that can hold positive cash flow, but established homes closer to the foreshore remain a solid choice for buyers who want long-term capital growth and don't need to offset losses against wage income.

Before applying, you'll need clarity on what you're borrowing, how the loan will be structured, and how the changes to negative gearing and capital gains tax will apply to your circumstances. Those decisions influence not just approval, but how the property performs financially over the years ahead.

How investment loan serviceability differs from a home loan

Lenders assess investment loans by taking a percentage of the expected rental income and adding it to your other income, then deducting all your liabilities and living expenses. Most lenders use 80 per cent of the gross rent when calculating serviceability, though some will only recognise 70 per cent. That discount reflects the possibility of vacancy, repairs, and body corporate or management fees.

The APRA serviceability buffer sits at 3 percentage points above the product rate, meaning your loan is tested at a rate higher than you'll actually pay. For investment lending, lenders also apply the debt-to-income cap separately from your owner-occupied borrowing. Since February, no more than 20 per cent of a lender's new investor loan book can go to borrowers with total debt above six times their gross income. That limit can reduce how much you're able to borrow, especially if you already carry a home loan or other investment debt.

Consider a Dromana buyer with a household income of $140,000 who owns their home with $380,000 still owing. They want to purchase an established two-bedroom unit that would rent for around $550 per week. At 80 per cent recognition, the lender adds $22,880 in annual rental income to their assessment. The DTI cap means their total lending across all properties cannot exceed $840,000 without the loan falling into the restricted 20 per cent bucket, which tightens appetite and often results in a declined application. If the existing home loan sits at $380,000, the investment loan amount would be capped near $460,000 under that rule, assuming no other debt.

Interest only or principal and interest repayments

Interest-only periods let you reduce monthly repayments during the early years of the loan, which can improve cash flow and leave more room to service other debt or cover holding costs. Most lenders offer interest-only terms of one to five years on investment loans, after which the loan reverts to principal and interest and the repayment rises. The appeal is strongest when rental income doesn't cover the full cost of principal and interest repayments, or when you're planning to use surplus cash to pay down non-deductible debt such as your home loan.

Principal and interest repayments build equity from day one and reduce the loan balance over time, which can matter if you're planning to refinance, access equity for further investment, or pay the property off before retirement. The trade-off is higher repayments and less short-term flexibility. Lenders assess your capacity to service the loan at the principal and interest rate even if you choose interest-only, so the approval amount doesn't change based on your selection.

In our experience, Dromana investors who expect strong rental yield and stable long-term tenants often choose principal and interest from the outset. Those buying holiday-adjacent properties with seasonal vacancy or planning to leverage equity within a few years tend toward interest-only in the first term. Neither option is inherently better, it depends on what you're trying to achieve and how the loan sits within your broader financial position.

Fixed rate, variable rate, or a split loan structure

A variable rate gives you access to offset accounts, the ability to make extra repayments without penalty, and the flexibility to refinance or restructure without paying break costs. Investor interest rates on variable products sit higher than owner-occupied rates, but the gap has narrowed since lenders started competing for portfolio lending again. Offset accounts work the same way as they do on a home loan: every dollar in the account reduces the balance on which interest is calculated, and the tax deduction remains intact because you're not making an actual repayment.

Fixed rates lock in your repayment and your interest cost for a set period, usually between one and five years. That certainty can help with budgeting and protect you if rates rise further, but you'll pay break costs if you sell, refinance, or repay more than the allowable extra repayment limit before the fixed term ends. Most fixed rate investment loans don't allow offset accounts, so any surplus cash sits in a separate savings account earning taxable interest instead of reducing your loan balance.

A split loan lets you fix part of the loan and leave the rest variable. That structure gives you partial rate protection and partial flexibility. Some investors split 50/50, others lean more heavily toward variable if they value access to an offset or expect to refinance within a few years. There's no single formula, the right mix depends on your cash flow, your risk tolerance, and what you're planning to do with the property over the next few years.

Deposit and LMI for investment property loans

Most lenders require a 20 per cent deposit to avoid Lenders Mortgage Insurance on an investment loan, though some will lend at 90 per cent LVR if you're prepared to pay the premium. LMI protects the lender, not you, and the cost is usually capitalised into the loan rather than paid upfront. On a loan amount above $400,000 at 90 per cent LVR, the premium can sit between $15,000 and $20,000 depending on the lender and your income profile.

If you already own property, you can often use equity in your home to fund the deposit rather than drawing down savings. Lenders calculate usable equity as 80 per cent of your home's current value, less what you owe. Borrowing against equity doesn't require you to sell or refinance your existing loan, but it does mean your home secures both debts. The interest on the portion used to buy the investment property remains deductible, while interest on your original home loan does not. Keeping those portions split at the loan structure level makes tax time cleaner and gives you flexibility if you decide to sell one property later.

Dromana's median house price has lifted over the past 18 months as buyers from Frankston and Mount Eliza move further down the peninsula for more land and water access. That growth has given local owner-occupiers more equity to work with, and we're seeing more applications where the deposit is sourced entirely from refinancing the family home rather than using cash.

Tax treatment under the new negative gearing rules

From 1 July 2027, net rental losses on established residential investment properties purchased after 7:30pm on 12 May 2026 cannot be offset against salary, wages, or other non-residential income. Those losses are quarantined and can only be used to reduce tax on future rental income or future capital gains from residential property. Properties you already own, or those you contracted to buy before that date and time, continue under the existing rules and remain fully negatively geared until you sell.

Eligible new residential dwellings are exempt from the quarantining rule. A new build is defined as a dwelling constructed on previously vacant land, or a development that increases the total number of dwellings on the site. A knock-down rebuild that results in the same number of dwellings does not qualify, nor does a renovation, no matter how substantial. If a new build is owner-occupied for more than 12 months before being sold to an investor, the next buyer loses access to negative gearing.

The rule doesn't prevent you from claiming interest, depreciation, or other holding costs. It only changes where you can use the loss. If your rental property generates a loss of $8,000 in a financial year and you have no other residential rental income, that $8,000 is carried forward and applied against future rent or future capital gains when you sell. The change matters most to buyers who rely on tax refunds from negatively geared properties to help manage cash flow, and it has made positive or neutral cash flow a higher priority in investor decision-making.

Capital gains tax changes and what they mean for long-term investors

From 1 July 2027, the 50 per cent CGT discount is replaced with cost base indexation and a minimum 30 per cent tax rate on real capital gains for most residential investment properties. The change applies only to gains that accrue after 1 July 2027. Any gain that built up before that date continues under the current rules, so if you buy now, part of your future capital gain will still benefit from the 50 per cent discount.

Indexation adjusts your original purchase price using the Consumer Price Index, which reduces the size of the taxable gain. The minimum 30 per cent tax rate applies to the indexed gain, regardless of your marginal rate. If you're on a lower marginal rate or receiving income support in the year you sell, the 30 per cent floor can result in a higher tax bill than you'd pay under the current rules. Eligible new builds retain access to the 50 per cent discount, and buyers of those properties can elect which method to use when they sell.

For Dromana investors buying established homes near the foreshore or in the Dromana village precinct, the new rules don't eliminate the case for investment, they just shift the analysis. Properties that deliver steady rental income and moderate long-term capital growth still perform well, but the tax benefit on exit is lower. That makes holding period, entry price, and rental yield more important than they were under the old settings.

Structuring your loan for long-term flexibility

How you structure your investment loan at the outset determines how much flexibility you have later. Splitting your loan into separate accounts, one for the land component and one for the building, doesn't offer a tax advantage unless you're buying as part of a development or SMSF strategy, but splitting your loan by purpose does. If you're refinancing your home and pulling out equity to fund an investment deposit, keep that equity portion in a separate split so the interest remains deductible and you can track it cleanly.

Offset accounts attached to the variable portion of your loan let you park surplus income and reduce interest without losing access to the funds. The interest saved is equivalent to earning interest at the loan rate, tax-free. If your marginal rate sits at 37 per cent and your variable rate is 6.5 per cent, every dollar in offset saves you more after tax than the same dollar sitting in a savings account earning 4 per cent.

Loan features worth considering include additional repayment options, portability if you plan to sell and buy another investment property, and the ability to redraw funds if your circumstances change. Not every lender offers every feature, and some come with higher rates or annual fees. The right structure depends on whether you're buying one property or building a portfolio, how long you plan to hold, and whether you expect to access equity again in the next few years.

Call one of our team or book an appointment at a time that works for you. We'll step through the borrowing options available, calculate your serviceability based on current settings, and structure the loan to suit how you're planning to hold and grow your investment over time.

Frequently Asked Questions