Everything You Need to Know About Investment Loans

Investment loans work differently to home loans, and those differences directly affect how much you can borrow and what you'll pay.

The lender assesses your borrowing capacity using rental income from the property, but they won't count all of it. Most banks apply a shading rate of around 80%, which means if the property generates $500 per week in rent, the lender will only count $400 towards your borrowing capacity. They also factor in a buffer, adding 3% to the interest rate when they test whether you can afford the repayments. That buffer means you need to demonstrate you can service the loan at a rate that's higher than what you'll actually pay.

How Parkdale's Rental Market Affects Your Borrowing

Parkdale's proximity to the beach and Mordialloc Creek Reserve makes it popular with renters, but vacancy rates and rental yield still matter when a lender assesses your application. A two-bedroom unit close to Parkdale station might rent for around $450 to $500 per week, while a three-bedroom house near the beach could fetch $600 or more. The lender will typically use a rental assessment from a valuer rather than taking your estimate, so it's worth getting realistic figures before you commit to a property.

In our experience, buyers sometimes overestimate what a property will rent for, especially if they're emotionally attached to a specific home. That miscalculation can reduce your borrowing capacity or mean the property doesn't stack up financially once you account for all the holding costs.

Interest Only or Principal and Interest

Interest only repayments mean you're only paying the interest portion each month, not reducing the loan amount. For investment properties, this keeps your repayments lower and your tax deductions higher, since all the interest on an investment loan is usually claimable. The downside is you're not building equity through repayments, only through any increase in the property's value.

Principal and interest repayments cost more each month but reduce your loan balance over time. Some investors prefer this approach because it builds equity faster and gives them a buffer if property values don't rise as expected. Most lenders will offer interest only periods of up to five years on an investment loan, after which the loan reverts to principal and interest unless you apply to extend it.

The choice often comes down to whether you're focused on cash flow now or equity growth over the long term. Both have a place depending on your strategy and how much rental income the property generates after expenses.

Deposit Requirements and Lenders Mortgage Insurance

You'll need at least a 10% deposit plus costs to buy an investment property, but most lenders prefer 20% to avoid Lenders Mortgage Insurance. LMI is a one-off premium that protects the lender if you default, and it can add thousands to your upfront costs. The premium increases as your deposit gets smaller, so a 10% deposit will attract a much higher LMI cost than a 15% deposit.

If you already own a home in Parkdale or elsewhere, you might be able to use equity in that property as part of your deposit rather than needing to save the full amount in cash. Lenders calculate equity as the difference between what your home is worth and what you owe on it, and they'll typically let you borrow up to 80% of the property's value without LMI. That means if your home is worth $900,000 and you owe $400,000, you have $500,000 in equity but can only access $320,000 of it without triggering LMI ($900,000 x 80% = $720,000, minus the $400,000 you already owe).

Variable or Fixed Rates for Investment Properties

Variable rates move with the market, which means your repayments can go up or down depending on what the Reserve Bank and your lender decide to do. Most investment loans sit on a variable rate because it gives you flexibility to make extra repayments or refinance without break costs. Fixed rates lock in your interest rate for a set period, usually between one and five years, which makes budgeting easier but limits your ability to pay down the loan early or switch lenders without a penalty.

Some investors split their loan between variable and fixed to get a bit of both. You might fix 50% or 60% to protect against rate rises, and keep the rest variable so you can make extra repayments or access an offset account. Most fixed rate products don't allow offset accounts, which can be a drawback if you want to park savings against your loan balance to reduce interest.

Rental Income and Tax Deductions

The rental income from your investment property is assessable, which means you'll pay tax on it at your marginal rate. But you can also claim deductions for expenses related to earning that income, including loan interest, property management fees, council rates, insurance, repairs, and depreciation on the building and fixtures. If your expenses exceed your rental income, that loss can usually be offset against your other income, like your salary, which reduces your overall tax.

From the 2027-28 income year, new rules will apply to properties bought after May 2026, limiting where you can claim those losses. Properties bought before that date, or eligible new builds bought after that date, will continue under the current rules. If you're buying an established property now, it's worth understanding how the timing affects your tax position over the life of the investment.

What Lenders Look at Beyond Income

Lenders assess investment loan applications differently to owner-occupier loans. They'll look at your current debts, including credit cards, personal loans, and any existing mortgages, and assume you're using the full limit on every account even if you're not. A credit card with a $10,000 limit might reduce your borrowing capacity by $30,000 or more, depending on the lender's calculations.

They'll also apply a debt-to-income limit, which caps your total borrowing at six times your gross annual income for a portion of their lending. Some borrowers sit just under that threshold and others have room to move, but it's become a more common constraint since early 2026. If you're already carrying a mortgage and other debts, the debt-to-income test can reduce how much you can borrow for an investment property even if your income easily covers the repayments.

Loan Features That Matter for Investors

Offset accounts let you park your savings in a separate account linked to your loan, and the balance in that account reduces the interest you're charged. If you have a $500,000 loan and $50,000 in your offset account, you'll only pay interest on $450,000. For investment loans on a variable rate, an offset account can be more tax effective than paying down the loan directly, because it keeps your deductible debt higher while still reducing your interest costs.

Redraw facilities let you access any extra repayments you've made on the loan, which can be useful if you need cash for renovations or another investment. The key difference is that offset balances stay separate from the loan, while redraw amounts have already been paid into the loan and need to be withdrawn. Some lenders charge fees for redraw or limit how often you can access the funds.

Most investment loans will include at least one of these features, but it's worth checking the terms before you commit, especially if you're planning to build up a cash buffer over time.

Refinancing an Existing Investment Loan

If you already have an investment property and your loan is sitting on a higher rate, refinancing might save you enough each year to make it worthwhile. Lenders compete more aggressively for new customers than they do for existing ones, so the rate you're paying now might be well above what's available if you switch.

The refinance process involves a full application and valuation, just like a new loan, and the lender will reassess your income, debts, and the property's rental income. If your circumstances have changed since you first bought the property, that can affect how much you're able to borrow or whether the refinance is approved at all. Most refinances take four to six weeks from application to settlement, and you'll need to factor in discharge fees from your current lender and application fees or valuation costs with the new one.

Consider a property investor who bought in Parkdale a few years ago and is now paying 6.5% on a loan that started at 2.5%. If the loan balance is $600,000, dropping the rate to 5.8% would save around $4,200 a year in interest. That saving might be enough to justify the time and cost involved, especially if the investor plans to hold the property for several more years.

Using Equity to Build a Property Portfolio

Once your first investment property has increased in value or you've paid down some of the loan, you can use that equity to fund a deposit on a second property without needing to save another lump sum in cash. Lenders will let you borrow against the equity in both your home and your existing investment properties, up to a combined loan to value ratio of 80% across your portfolio to avoid LMI.

The catch is that your borrowing capacity doesn't increase just because your equity does. You still need enough income to service all the loans, and the lender will assess each new application based on your current debt position and the rental income from each property. Some investors hit a serviceability ceiling after two or three properties, even though they have enough equity to keep going.

If you're thinking about building a portfolio rather than just buying one investment property, it's worth mapping out the numbers early so you know how much income you'll need and whether your current structure will support multiple loans. A loan health check can show you where you sit now and what might need to change before you apply for the next one.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions