The Pros and Cons of Property Investment Loans

Investment Loans Work Differently to Home Loans

An investment loan is a mortgage secured against property you buy to rent out rather than live in. The loan itself looks similar on paper, but lenders assess it differently, price it higher, and the tax treatment runs in the opposite direction to an owner-occupied loan.

Banks treat investment borrowing as higher risk. That flows through to serviceability tests, interest rates and the way your borrowing capacity is calculated. An officer earning $95,000 might qualify for a $550,000 owner-occupied loan but closer to $480,000 for an investment loan, even with the same deposit. The rental income from the property helps, but lenders discount it by around 20 per cent to account for vacancy and maintenance costs before adding it to your serviceability.

The tax side is where the mechanics reverse. Interest on an owner-occupied loan costs you after-tax income. Interest on an investment loan is deductible against your assessable income, provided the property is rented or genuinely available for rent. That deduction offsets some of the higher interest rate, though the benefit depends on your marginal tax rate.

What Changed in the 2026 Tax Reforms

If you bought an established investment property before 12 May 2026, or you're buying a new build now, the old rules still apply. You can deduct all your holding costs, including interest, against your total income. If the property runs at a loss, that loss reduces your taxable income from all sources, including your police salary.

From the 2027-28 income year, losses on established properties bought after 12 May 2026 can only be offset against income from other residential properties. If you don't have other property income, the loss carries forward and waits until you do, either from rent or a capital gain when you sell. New builds remain fully deductible regardless of purchase date.

The capital gains treatment also split. For gains that build up to 1 July 2027, the old 50 per cent discount applies if you've held the property for more than 12 months. For gains that accrue from 1 July 2027 onward, you index your cost base to inflation and pay at least 30 per cent tax on the real gain. If you're buying a new build, you can choose whichever method works in your favour at sale time.

Those changes don't kill the case for investing, but they do change the numbers. An officer buying an established property today who expects to hold it for ten years needs to model both the carry cost and the exit tax under the new structure, not the old assumptions.

Interest Only vs Principal and Interest Repayments

Most investors choose interest-only repayments for the first few years. You pay only the interest each month, which keeps the loan balance flat and the repayment lower. That gives you more cash flow to cover shortfalls or save toward the next deposit.

An interest-only investment loan of $450,000 at current variable rates might cost around $2,100 per month. The same loan on principal and interest would be closer to $2,600. That $500 difference matters when you're covering a vacancy or a hot water system.

Interest-only periods usually run for one to five years, then revert to principal and interest unless you apply to extend. Some lenders cap the total interest-only period at ten years. If your loan-to-value ratio sits above 80 per cent and the interest-only term exceeds five years, the loan is classified as non-standard under prudential rules, which can affect pricing and appetite from some lenders.

The trade-off is that you're not reducing the debt. When the interest-only period ends, the principal and interest repayment is calculated over the remaining loan term, so the monthly cost jumps. That's manageable if rents have increased or you've paid down other debts in the meantime, but it catches out investors who haven't planned for it.

How Lenders Assess Rental Income

When you apply for an investment loan, the lender adds rental income to your salary, but not at face value. Most lenders take 80 per cent of the expected rent and use that figure in the serviceability calculation. The 20 per cent shave accounts for vacancy, repairs and holding costs.

If a property in Ipswich rents for $480 per week, the lender uses $384 per week, or around $1,664 per month. That gets added to your income, then the loan repayment gets tested at the product rate plus a 3 percentage point buffer. If the product rate is 6.3 per cent, you're assessed at 9.3 per cent.

That buffer is set by the prudential regulator and applies to all new loans from banks and credit unions. It's been at 3 percentage points since late 2021. The buffer doesn't change your actual repayment, but it does limit how much you can borrow.

The Deposit Requirement and LMI on Investment Loans

Most lenders want a 20 per cent deposit for an investment loan. Anything less usually triggers Lenders Mortgage Insurance, which adds several thousand dollars to the upfront cost. LMI on a 10 per cent deposit investment loan can run to $15,000 or more, depending on the loan amount.

Some lenders will go to 90 per cent LVR for investment loans, but appetite varies and the rate is higher. Police officers can sometimes access LMI waivers on investment loans up to 90 per cent with certain lenders, which removes that upfront premium. Not every lender offers it, and some cap the waiver at 85 per cent for investors, but it's worth checking before you assume you need the full 20 per cent deposit.

If you're using equity from your home to fund the deposit, the combined loan-to-value ratio across both properties factors into the assessment. A lender might release equity up to 80 per cent of your home's value without requiring LMI on the top-up, but once the combined position pushes past that, LMI applies to the excess.

Variable vs Fixed Rates for Investment Loans

Variable rates on investment loans sit around 0.3 to 0.5 percentage points higher than owner-occupied variable rates with the same lender. Fixed rates carry a similar margin. That gap reflects the higher capital cost banks face under the prudential framework for investment lending.

A variable rate gives you flexibility to make extra repayments or refinance without break costs. If you're planning to pay down the loan aggressively or sell within a few years, variable makes sense. If you want certainty and you're comfortable with the rate, a fixed term of two to four years locks it in.

Some investors split the loan, fixing half and leaving half variable. That hedges the rate risk and keeps some flexibility. The downside is you're managing two loan accounts, and not all lenders offer splits on investment loans without higher fees.

Break costs on fixed investment loans are calculated the same way as on owner-occupied loans, but because investment loans often carry higher balances and longer fixed terms, the dollar impact can be larger if rates have moved.

Debt-to-Income Limits From February 2026

From 1 February 2026, banks can only lend 20 per cent of their new investment loans to borrowers with total debt six times their income or higher. The limit applies separately to investment lending, so it doesn't directly affect your owner-occupied borrowing, but it does mean some investors hit a ceiling earlier than they used to.

Consider an officer earning $100,000 with an existing home loan of $400,000 who wants to borrow another $300,000 for an investment property. Total debt would be $700,000, which is seven times income. That application would fall into the high DTI bucket, and the lender has limited capacity to approve loans in that bucket each quarter.

In practice, most lenders hit their 20 per cent quota early in the quarter and then tighten appetite for high DTI lending until the next quarter starts. If your debt-to-income ratio sits above six, timing and lender choice matter more than they did 18 months ago. Some non-bank lenders aren't subject to the DTI limit and still have appetite, though their rates are typically higher.

Using Equity to Build a Portfolio

Once your home has built up equity, you can borrow against it to fund the deposit on an investment property without selling or saving from scratch. If your home is worth $650,000 and you owe $380,000, you have $270,000 in equity. A lender might let you access up to 80 per cent of the property value, which is $520,000, meaning you could release up to $140,000 for a deposit elsewhere.

That borrowed deposit is then secured against your home, but the interest on it becomes deductible once it's used to buy an investment property. Keeping that borrowing separate in a split loan or standalone facility makes the tax tracking cleaner at year-end.

Equity release works well for officers who've been in their home for five or more years and have seen capital growth. The risk is that you're increasing total debt without increasing income, so serviceability tightens. If your existing home loan is already close to your maximum borrowing capacity, releasing equity might not be possible without refinancing to a lender with different serviceability settings.

Claimable Expenses Beyond Interest

Interest is the largest deduction, but it's not the only one. Council rates, water charges, building insurance, landlord insurance, property management fees, repairs, and depreciation on the building and fixtures are all claimable while the property is rented or available for rent.

Repairs are deductible in the year you incur them. Capital improvements, like renovating a kitchen, get claimed through depreciation over several years. Strata levies are deductible if the property is in a body corporate. Stamp duty and other purchase costs aren't deductible upfront but are added to your cost base, which reduces the capital gain when you sell.

Keeping a separate bank account for the investment property makes record-keeping simpler. The ATO has become more active in auditing rental property deductions, particularly around interest apportionment and overclaimed depreciation, so accurate records matter.

When Refinancing an Investment Loan Makes Sense

Rates on older investment loans are often 0.5 to 1.0 percentage points higher than what the same lender offers new customers today. If your loan is more than two years old and you haven't refinanced, you're likely paying more than you need to.

Investment loan refinancing can also unlock equity for a second purchase, switch you from interest-only back to interest-only after the initial period expires, or move you to a lender with higher serviceability settings that allow additional borrowing.

The cost to refinance includes discharge fees from your current lender, application fees with the new lender, valuation and legal costs. That's typically $1,000 to $2,000. If refinancing saves you $150 per month, the payback period is under a year.

Some lenders offer cashback incentives for refinancing investment loans, which can offset the switching cost. Those incentives usually require you to hold the loan for a minimum period before refinancing again, or you repay the cashback.

Building Wealth Around Shift Work

Property investment suits police work because it doesn't require daily attention. Once a property manager is in place and the loan is set up with an offset or redraw, the property mostly runs itself. You're not trading time for income or managing a side business during your rest days.

The wealth builds through two channels: rental income that covers or partially covers the loan, and capital growth that builds equity over time. Even if the property runs at a small loss each year after tax deductions, long-term capital growth often delivers the bulk of the return.

That time frame matters. Officers who buy investment property expecting short-term gains or quick flips usually find the transaction costs and holding costs eat the profit. A ten-year hold is closer to the norm for investors who build meaningful equity.

Roster unpredictability makes passive income appealing, but it also means your borrowing capacity can fluctuate depending on how overtime and allowances are treated by the lender. Some lenders count 100 per cent of regular allowances. Others discount them or exclude overtime altogether. That variance can shift your maximum loan amount by $50,000 or more, which is enough to change which properties you can afford.

Call one of our team or book an appointment at a time that works for you. We work with lenders who understand shift income and can walk you through the current landscape without the jargon.

Frequently Asked Questions