Investment Loans and What to Know Before You Buy

What an Investment Loan Actually Covers

An investment loan is finance secured against a property you buy to rent out, not to live in. The lender assesses your application on rental income, your salary, and existing debts. Loan features, rates, and approval criteria differ from owner-occupier products because the lender treats investment borrowing as higher risk.

In our experience, detectives applying for an investment loan often underestimate how lenders treat rental income. Most ADIs will recognise 70 to 80 per cent of expected rental income when calculating your capacity to service the investment loan. If a property in an inner-city suburb rents for $600 per week, the lender might only count $420 to $480 of that when working out whether you can meet the repayments. The balance is treated as a buffer for vacancy periods, maintenance, and body corporate costs where applicable. That discount affects how much you can borrow, particularly if you are already carrying other debt.

Deposit Size and LMI on Investment Property Finance

Most lenders require at least a 10 per cent deposit on an established investment property, though some will lend at 10.01 per cent and charge LMI on the portion above 80 per cent LVR. At 90 per cent LVR, the premium is substantial. Consider a buyer who secures finance on an established unit at 90 per cent LVR. The LMI premium could add several thousand dollars to upfront costs, capitalised into the loan amount or paid in cash at settlement. That borrower also faces a higher interest rate because the lender applies risk-based pricing to loans above 80 per cent LVR. The outcome is higher monthly repayments and a longer path to building equity in the property.

If you have equity in an existing property, you may be able to leverage that equity to cover the deposit and avoid paying LMI out of pocket. Some professions, including law enforcement, can access LMI waivers or reduced premiums on owner-occupier loans, but those concessions rarely extend to investment lending.

Interest Rates: Variable or Fixed, and What Lenders Actually Charge

Investor interest rates sit above owner-occupier rates at every LVR band. At current variable rates, the gap is typically 0.30 to 0.60 percentage points, depending on the lender and your borrowing profile. Fixed rates on investment loans also carry a premium. That margin reflects the higher capital weighting banks assign to investment lending under APS 112, which increases the cost of holding the loan on their balance sheet.

Whether you choose variable or fixed depends on cash flow and risk appetite. A variable rate gives you flexibility to make extra repayments and access offset accounts, which can reduce the taxable component of your loan if structured correctly. A fixed rate locks in repayments for a set period but limits your ability to repay ahead without incurring break costs. Splitting the loan between fixed and variable gives you some certainty on part of the debt while preserving flexibility on the rest. If rates rise during your fixed term, you are protected on that portion. If they fall, you can redirect surplus cash to the variable portion or hold it in an offset account linked to that split.

Interest-Only Repayments and How They Affect Borrowing Capacity

Interest-only repayments reduce your monthly outgoings during the interest-only period, which is typically one to five years on an investment loan. You are not paying down the principal, so the loan balance stays the same and the property's cash flow improves. That structure suits investors prioritising tax deductions and portfolio growth over debt reduction.

Lenders assess interest-only applications at a higher interest rate buffer than principal-and-interest loans. Under APRA's serviceability rules, all new borrowers are tested at the loan product rate plus at least 3.0 percentage points. For interest-only applications, some lenders add a further margin or assess the loan as if it were principal-and-interest from day one. A detective applying for an interest-only investment loan at a product rate of 6.5 per cent might be assessed at 9.5 per cent or higher, depending on the lender's policy. That higher test rate reduces your maximum borrowing capacity compared to a principal-and-interest structure, even though your actual repayments are lower during the interest-only term.

From a tax perspective, interest on an investment loan is deductible, and keeping the loan balance higher for longer maximises that deduction. If you have both owner-occupier and investment debt, paying down the non-deductible loan first and keeping the investment loan interest-only can improve your after-tax position. Speak to an accountant before locking in a structure, particularly if you plan to refinance or expand your portfolio later.

Rental Income, Vacancy Rates, and What the Bank Actually Counts

Lenders apply a discount to rental income and add notional vacancy costs when assessing serviceability. The actual rental figure matters less than what the lender will recognise. A two-bedroom unit close to a major hospital or university precinct might generate $550 per week, but the lender will apply a 20 to 30 per cent haircut and assess your capacity on $385 to $440 per week.

Body corporate fees, council rates, insurance, and property management costs are not always deducted individually in the lender's calculator, but they reduce your disposable income when the full expense position is declared. Where a property has high body corporate fees, such as in a building with a pool, gym, or lift access, those costs can push your debt-to-income ratio above the threshold some lenders will accept, even if the rental yield looks acceptable on paper. APRA's DTI limit, which applies from February of this year, restricts ADIs to lending no more than 20 per cent of new investment loans to borrowers with total debt of six times income or more. That cap does not prohibit high DTI lending outright, but it tightens the funnel and makes lender choice more important if your DTI sits near or above that line.

Tax Treatment: Deductions, Negative Gearing, and What Changed in May Last Year

Interest, property management fees, insurance, rates, and depreciation on an investment property are all deductible against rental income. Where expenses exceed income, the loss can be offset against your salary under negative gearing rules, reducing your taxable income and increasing your refund or reducing tax payable.

For properties held at 7:30pm AEST on 12 May 2026, negative gearing continues to operate as it always has. Losses remain fully deductible against all income, including salary, until you sell. For established investment properties purchased after that date, losses can only be offset against other residential property income from the 2027-28 income year onward. Excess losses carry forward and can be used in future years against residential property income, including capital gains when you sell.

The distinction matters if you are buying an established property now. You will have access to negative gearing under the old rules until 30 June 2027, after which the new quarantining applies. That does not mean the investment becomes unviable, but it changes the cash flow equation. If you rely on a tax refund to cover holding costs, you will need to fund those costs from other sources once quarantining starts. If you are buying your first investment property, factor in the post-June 2027 tax position from the outset rather than assuming current rules continue indefinitely.

Applying for an Investment Loan: What Lenders Want to See

Lenders ask for payslips, tax returns, bank statements, rental appraisals, and a contract of sale. If you are buying off-market or in a regional area, they may also request a full valuation rather than relying on an automated valuation model. The rental appraisal must come from a licensed property manager in the area and should show a realistic weekly rent, not an optimistic figure.

Your existing debts, credit cards, and buy-now-pay-later accounts all reduce your borrowing capacity. A detective with a $10,000 credit limit who never uses the card will still have the full limit counted as a potential draw in the serviceability assessment, typically at a notional repayment rate of 3 to 4 per cent of the limit per month. Closing accounts you do not use before applying can lift your borrowing capacity by several thousand dollars, depending on the limits involved. If you are currently renting and applying for an investment loan, the lender will continue to count your rent as an expense even though you are not moving into the property you are buying. That double-film of housing costs tightens serviceability further.

Loan Features That Matter and Ones That Don't

Offset accounts reduce the interest charged on a variable investment loan without reducing the deductible loan balance. You hold surplus cash in the offset, reduce interest, and preserve the full loan amount for tax purposes. Redraw facilities allow you to pull money back out after making extra repayments, but redrawing can create complications if you later convert the property to owner-occupied or refinance. Offset accounts are simpler to manage and easier to unwind.

Rate discounts on investment loans are usually smaller than on owner-occupier products, and not all lenders offer the same margin below the reference rate. A lender advertising a 0.80 per cent discount on investor variable loans may apply that to a higher base rate than a competitor offering a 0.60 per cent discount. Compare the actual rate, not the discount. If portability matters because you plan to sell and buy another investment property, check whether the lender allows you to port the loan to a new security without reapplying or paying discharge and application fees again.

Call one of our team or book an appointment at a time that works for you. We work with lenders across the board and can line up a loan structure that fits your roster and your plans, whether you are buying your first rental or expanding your property portfolio.

Frequently Asked Questions