What Are Investment Loans & How Property Finance Works

An investment loan is finance secured against a property you intend to rent out rather than live in.

Lenders assess these applications differently to owner-occupier finance. The rental income can support servicing, but vacancy periods, ongoing costs and regulatory settings all influence how much you can borrow and at what rate. Two major tax changes take effect from 1 July 2027, and while properties held before mid-May 2026 are grandfathered, new purchases follow a different set of rules. Understanding how lenders calculate serviceability and how the tax treatment affects cashflow is the foundation for any property investment decision.

How Lenders Calculate What You Can Borrow

Lenders assess investment loan applications using the interest rate on the loan plus a serviceability buffer of three percentage points, then apply separate debt-to-income caps to investor and owner-occupier portfolios. From 1 February 2026, no more than 20 per cent of new investor loans from an authorised deposit-taking institution may exceed a debt-to-income ratio of six times gross income.

Consider a buyer with gross annual income of $120,000 applying for an investment loan to purchase a unit in Mandurah. If they already hold $400,000 in owner-occupied debt, the lender will measure total debt against income. A further $320,000 in investor debt would bring the combined ratio to exactly six times income. Any amount above that figure falls into the lender's 20 per cent allocation, which may already be exhausted depending on the institution's quarterly position. Rental income is included in serviceability calculations, usually at 80 per cent of the lease amount to account for vacancy and management costs. The same buyer with a lease of $450 per week would have $360 per week recognised for servicing, or approximately $18,720 per year. That amount is added to salary when calculating whether repayments can be met at the assessed rate.

Deposit Requirements and Lenders Mortgage Insurance

Most lenders require a minimum 10 per cent genuine savings deposit for an investment property, though a loan to value ratio above 80 per cent will attract Lenders Mortgage Insurance. LMI is a one-off premium that protects the lender if the property is sold for less than the outstanding debt, and the cost rises sharply as the deposit falls.

A buyer borrowing 90 per cent of the property value will pay LMI, and that premium can be capitalised into the loan amount. The calculation depends on the loan size, the LVR and the lender's pricing, but it is not uncommon for LMI on a $450,000 loan at 90 per cent LVR to exceed $15,000. If the buyer can increase the deposit to 20 per cent, the premium disappears entirely. For investors building a portfolio, avoiding LMI on the first property preserves equity that can be released later to fund a deposit on the second.

Interest Only Repayments and Cashflow Management

Interest only repayments reduce the monthly cost of holding an investment property by deferring principal repayments for a set period, typically one to five years. The loan does not reduce during that time, but the lower repayment improves cashflow and can make the difference between a property that generates a small monthly loss and one that breaks even.

Lenders assess interest only applications at the principal and interest repayment rate plus the serviceability buffer, so the lower repayment does not increase borrowing capacity. The benefit is realised after settlement. A variable rate interest only loan gives the investor the option to make lump sum principal reductions when circumstances allow, while retaining the lower minimum repayment. Once the interest only period expires, the loan reverts to principal and interest and the repayment increases. Investors should factor that increase into long-term cashflow projections, particularly if they plan to hold the property beyond the initial period.

Negative Gearing Quarantine from 1 July 2027

From 1 July 2027, net rental losses on residential investment properties purchased on or after 7:30pm AEST on 12 May 2026 can only be offset against other residential rental income or carried forward. Those losses cannot be used to reduce salary, wages or other non-residential income for tax purposes.

Properties purchased before that date and time, including those under contract awaiting settlement, remain fully negatively geared under the existing rules until sold. Eligible new builds, defined as dwellings constructed on previously vacant land or where the number of dwellings increases, retain full negative gearing regardless of purchase date. A knock-down rebuild that does not increase dwelling numbers does not qualify. An investor acquiring an established unit in Mandurah after the cut-off date who incurs a $12,000 annual rental loss can carry that loss forward to offset future rental profit or a capital gain on sale, but cannot claim it against employment income in the year it is incurred. The quarantine does not prevent the deduction of interest or other expenses. It changes when and against what income type the loss can be applied.

Capital Gains Tax and Cost Base Indexation

The 50 per cent capital gains tax discount for individuals is replaced from 1 July 2027 with cost base indexation and a minimum 30 per cent tax rate on real gains, but only for gains accruing after that date. Gains accrued before 1 July 2027 on properties already held continue under current rules.

An investor who purchases an established property in June 2027 and sells it in June 2032 will calculate the gain by indexing the cost base using the Consumer Price Index for the period after 1 July 2027, then apply a minimum 30 per cent tax rate to the indexed gain. If the investor is a recipient of a means-tested income support payment in the year of sale, the 30 per cent minimum does not apply. Eligible new build properties allow the investor to elect between the 50 per cent discount and indexation with the minimum rate. The election is made at the time of sale, giving the investor the option to choose whichever method produces the lower tax liability.

Variable Rate or Fixed Rate for Investment Property

Variable rate investment loans allow unlimited additional repayments and access to offset accounts, while fixed rate products lock in repayments for a set term but typically restrict extra repayments and do not offer offset. The choice depends on whether rate certainty or flexibility is the priority.

Investors who expect rental income to cover most or all of the repayment may prefer a variable rate with an offset account, allowing any surplus income or savings to sit in offset and reduce interest daily. Investors with irregular income or those concerned about rate increases over the next two to three years may prefer a fixed rate. Some lenders offer a split structure, fixing part of the loan and leaving the remainder on a variable rate with offset. That approach provides partial protection against rate rises while retaining access to flexibility on the variable portion. For investors holding multiple properties, the structure of each loan should reflect the cashflow and risk profile of that particular asset rather than applying the same approach across the portfolio.

Refinancing Investment Loans and Rate Discounts

Investor interest rates are typically higher than owner-occupier rates, and the margin varies between lenders. Refinancing an investment loan to a lender offering a larger rate discount can reduce the interest cost without changing the loan structure.

Lenders periodically adjust their pricing, and an investor who has held the same loan for two or three years may be paying a rate that no longer reflects the current market. A review of the loan against current investment loan options available from banks and lenders across Australia can identify whether refinancing will produce a tangible saving. The comparison should account for discharge fees, application fees and valuation costs, though many lenders will rebate or waive fees to attract refinance applications. If the property has increased in value since purchase, refinancing may also allow the investor to access equity for a deposit on a second property without selling the first.

Claimable Expenses and Maximising Tax Deductions

Interest on borrowings used to acquire or hold a rental property is deductible to the extent the property is rented or genuinely available for rent. Other claimable expenses include property management fees, council rates, water charges, landlord insurance, repairs and maintenance, body corporate fees, and depreciation on the building and fixtures.

Lenders do not assess the tax benefit when calculating serviceability, but the investor's accountant will factor deductions into the after-tax cost of holding the property. An investor paying $28,000 in annual interest, $3,500 in body corporate fees, $2,200 in council and water rates, $1,800 in property management and $1,500 in landlord insurance has $37,000 in cash expenses before accounting for depreciation. If the property is leased at $450 per week, gross rental income is $23,400. The $13,600 cashflow shortfall is reduced by the tax benefit of the deductions, which depends on the investor's marginal tax rate. For properties acquired after the negative gearing cut-off, that loss is quarantined and carried forward rather than applied against other income in the current year.

Building wealth through property investment depends on matching the loan structure, deposit strategy and tax treatment to the investor's income, risk tolerance and timeline. Regulatory settings change, and each property is assessed on its own merits. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions