The way you structure an investment loan affects more than your monthly repayments. It shapes your tax position, your borrowing capacity for future purchases, and how much flexibility you have when circumstances change.
Investors in Herston who are considering their first or next rental property often focus on securing approval and comparing rates. Those are important, but the structure you choose at the start determines how your loan behaves over time. A loan with the wrong repayment type or offset arrangement can cost you thousands in unnecessary tax or lock you into inflexibility you did not anticipate.
Interest Only or Principal and Interest
Interest only loans allow you to pay only the interest portion of the loan for a set period, typically one to five years. Principal and interest loans require you to pay both interest and reduce the loan balance from the beginning.
Interest only repayments can appeal to property investors because they reduce the required repayment during the interest only period and can help preserve cash flow for other purposes. Consider an investor who borrows to purchase a two-bedroom unit in Herston, within walking distance of the Royal Brisbane and Women's Hospital precinct. If the loan is structured as interest only, the investor pays only the interest component during the interest only period. Where the borrowed funds are used wholly for an income-producing investment property, the interest may generally be tax deductible, subject to the investor's circumstances and applicable tax rules. The loan principal itself does not reduce during this period.
Once the interest only period ends, the loan generally reverts to principal and interest repayments over the remaining loan term. This can result in a noticeable increase in repayments. Some investors may refinance or apply for a further interest only period before this occurs, although this remains subject to the lender's credit assessment and approval. This can be particularly relevant for investors who are building a portfolio and want to manage cash flow and borrowing capacity.
Variable Rate, Fixed Rate or Split
A variable rate loan moves with the market. When lenders adjust their rates, your repayments change. A fixed rate loan locks in a rate for a set period, usually one to five years. A split loan divides the balance between variable and fixed.
Investors who want certainty over their repayments during the interest only period often fix a portion of the loan. This approach suits buyers who have tight cashflow or who want to know exactly what their deductible interest expense will be for budgeting and tax planning. The trade-off is reduced flexibility. If you want to make extra repayments or refinance before the fixed period ends, you may face break costs.
A split structure gives you some rate protection while keeping part of the loan variable, which allows access to offset accounts and the ability to make extra repayments without penalty. We regularly see this approach used by investors who expect their income or rental market conditions to fluctuate and want to retain options without committing entirely to one rate type.
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Offset Accounts and Their Role in Investment Structures
An offset account is a transaction account linked to your loan. The balance in the offset account reduces the amount of the loan on which interest is calculated, while the loan balance itself remains unchanged.
Offset accounts can be useful for both owner-occupied and investment loans. If an offset is linked to an investment loan, holding cash in the account reduces the interest charged on that loan. Where that interest would otherwise be tax deductible, the deductible interest expense will also reduce because less interest has actually been incurred.
For investors who also have an owner-occupied home loan, it may be beneficial to consider where surplus cash is held. For example, directing surplus cash towards an offset linked to a non-deductible home loan may reduce non-deductible interest while keeping investment and personal borrowings separate. The most appropriate structure will depend on your individual circumstances, and independent tax advice should be obtained when considering the tax implications of different loan structures.
Keeping Loan Purposes Separate
Keeping different borrowing purposes in separate loan accounts or loan splits can make an investment portfolio easier to manage. For example, separating owner-occupied debt, investment property lending and equity released for another investment can make it easier to identify how borrowed funds have been used.
This is particularly important for tax record keeping because the deductibility of interest generally depends on the purpose for which the borrowed funds are used, rather than which property has been provided as security for the loan. If private and investment expenditure are mixed within the same loan, the interest may need to be apportioned between deductible and non-deductible purposes.
Separate loan splits can also provide greater flexibility when it comes to refinancing, selling a property or reviewing your lending structure in the future. The most appropriate structure will depend on the lender, the properties being used as security and your individual circumstances.
Loan to Value Ratio and Lenders Mortgage Insurance
Loan to value ratio measures the loan amount as a percentage of the property value. Borrowing above 80% LVR will commonly result in Lenders Mortgage Insurance being required, although lender policies and eligibility criteria vary. LMI protects the lender if the borrower is unable to repay the loan, even though the premium is generally paid by the borrower either upfront or by being capitalised into the loan.
For investors, LMI may be an option where borrowing at a higher LVR allows them to enter the market sooner or retain more of their available cash. LMI is generally treated as a borrowing expense for tax purposes rather than an immediate deduction. Where total eligible borrowing expenses exceed $100, the deduction is generally spread over five years or the term of the loan, whichever is shorter. Independent tax advice should be obtained regarding how these rules apply to your circumstances.
Herston's proximity to the Royal Brisbane and Women's Hospital, QUT Kelvin Grove and surrounding employment and education precincts may be relevant when assessing the area as a potential investment location. Investors should still consider factors such as current rental demand, vacancy rates, property type, purchase price and ongoing holding costs when assessing an investment.
Line of Credit Structures
A line of credit is a loan facility that allows you to draw funds up to an approved limit, repay them and redraw as needed. Interest is charged on the amount you have drawn at any given time.
Lines of credit are sometimes used by investors to fund deposits, settlement costs or renovation work on investment properties. The purpose of each drawdown is important because the deductibility of interest depends on how the borrowed funds are used. If part of the facility is used for private expenditure, the interest relating to that portion will generally not be deductible.
Where a line of credit is used for investment purposes, keeping clear records and avoiding a mixture of private and investment expenditure can make the facility easier to manage from a tax and record-keeping perspective. If private and investment borrowings are mixed within the same facility, the interest may need to be apportioned between the different purposes.
Debt Recycling and Equity Release
Debt recycling is a strategy that generally involves using available equity to invest while directing income or savings towards reducing non-deductible owner-occupied debt. Over time, this may result in a greater proportion of a borrower's overall debt being associated with income-producing investments.
Equity release allows you to access some of the available equity in a property without selling it. If a property has increased in value or the existing loan has been reduced, you may be able to refinance or establish a separate loan split to help fund another investment. Where additional borrowing is used for an income-producing purpose, the interest on that borrowing may be tax deductible, subject to the use of the funds and the investor's individual circumstances.
Both strategies require careful structuring because the purpose and use of the borrowed funds are important when determining the tax treatment of interest. Debt recycling can also involve significant tax and financial considerations, so appropriate independent tax or financial advice should be obtained.
Lenders will also assess your ability to service the total debt. From 1 February 2026, APRA-regulated banks are subject to a limit that restricts new residential mortgage lending to borrowers with debt-to-income ratios of six times or greater to no more than 20% of new lending. The limit applies separately to owner-occupier and investor lending. This does not prevent borrowers with higher debt-to-income ratios from obtaining finance, but individual lender policies and available lending capacity can affect an application.
Structuring for Tax Changes and Portfolio Growth
Investment loan structures should be considered alongside both current tax settings and future flexibility. Recent changes to negative gearing and capital gains tax mean the tax treatment of residential investment property may differ depending on when the property was acquired and whether it qualifies as a new build.
From the 2027–28 income year, losses from established residential investment properties acquired after 7:30pm AEST on 12 May 2026 generally cannot be deducted against salary or other non-residential property income. Instead, eligible losses can generally be offset against income from residential property, including eligible capital gains, with excess losses carried forward to future years. Properties held before 7:30pm AEST on 12 May 2026 remain subject to the previous negative gearing arrangements, while eligible new builds continue to have access to negative gearing.
These changes do not alter the basic mechanics of an investment loan, but they can affect the after-tax cash flow of an investment property. Loan structure should therefore be considered alongside expected rental income, property expenses, borrowing capacity and the investor's broader financial position rather than being based on tax outcomes alone.
Speaking with a mortgage broker who understands investment lending can help you compare lenders, repayment structures and loan features based on your circumstances and longer-term property strategy. Tax consequences should be discussed separately with a suitably qualified tax adviser.
Ready to Review Your Investment Loan Structure?
Whether you're purchasing your first investment property, expanding an existing portfolio or reviewing how your current loans are structured, Wealthcove can assess your borrowing capacity and compare lenders, repayment structures and loan features based on your circumstances. Book an appointment with Liam Pahl, Finance & Mortgage Broker at Wealthcove or call Liam directly on 0452 646 192 to discuss your investment loan options.
