Choosing the Right Investment Loan Structure for Rental Property
Your choice between interest-only and principal-and-interest repayments affects both cashflow and how much equity you build in the property. Interest-only keeps required repayments lower during the interest-only period, which can help preserve cashflow in the early years when you're balancing rental income against holding costs. Principal-and-interest repayments reduce the loan balance over time, with the amount of interest incurred generally falling as the principal is repaid.
Consider a buyer who purchases a two-bedroom unit near Boundary Street at the suburb's current median. They structure the loan as interest-only for five years with a variable rate. Rental income covers most of the monthly repayment, leaving them with a smaller weekly shortfall to cover from their salary. After five years, they switch to principal-and-interest. By that point, their income has increased and they're comfortable absorbing the higher repayment. The initial interest-only period gave them time to stabilise cashflow without stretching their budget too tightly at the start.
You're not necessarily locked into one structure permanently. Depending on the lender and loan product, you may be able to change between interest-only and principal-and-interest during the life of the loan. Interest-only periods are generally approved for a fixed term, and extending or commencing another interest-only period may require the lender to reassess your circumstances and serviceability.
Variable or Fixed Rates for Property Investment
A variable rate generally provides greater flexibility to make extra repayments and may provide access to features such as redraw and offset accounts, depending on the loan product. A fixed rate provides repayment certainty for a set period but commonly comes with limits on additional repayments and may have limited or no offset functionality.
Some investors split their loan between variable and fixed. Half the loan might sit on a fixed rate to provide certainty around a portion of the repayment, while the other half remains variable to retain flexibility. The split doesn't need to be 50-50. You can weight it however suits your circumstances.
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If variable rates fall and your lender passes on the reduction, the variable portion may benefit from the lower rate. If rates rise, the fixed portion remains protected from that increase for the remainder of the fixed term. The downside is that you're managing two loan accounts instead of one, and break costs may apply if you sell, refinance or make certain additional repayments before the fixed period ends.
Loan to Value Ratio and Deposit Requirements
The maximum loan-to-value ratio available for an investment property depends on the lender, borrower and property. Many lenders offer investment lending above 80% LVR, including up to 90% LVR in some circumstances, subject to lender policy and Lenders Mortgage Insurance requirements.
If you're borrowing above 80%, LMI will commonly apply unless you qualify for a lender-specific exemption or policy. The premium depends on factors including the loan amount and LVR and may be added to the loan balance, subject to the lender's maximum allowable LVR.
If you already own property, you may be able to use equity in that property as your deposit rather than contributing the entire amount in cash. The lender values your existing property, assesses the amount of equity available and determines how much can be released based on its lending policy and your borrowing capacity. You may also be able to borrow some or all of the purchase costs where sufficient usable equity and borrowing capacity are available.
Since February 2026, APRA-regulated banks have been required to limit the proportion of new residential mortgage lending with a debt-to-income ratio of six times or greater to 20%, with the limit applying separately to owner-occupier and investor lending. This is a lender-level portfolio limit rather than an automatic borrowing cap for an individual applicant. Loans for the purchase or construction of new dwellings are exempt from the DTI limit.
If you're already carrying debt from an existing home loan or personal loan, those debts can affect both your DTI and overall borrowing capacity.
Tax Treatment for Investment Property Borrowing
Interest on an investment loan may generally be deductible to the extent the borrowed funds are used for an income-producing rental property. Other holding costs such as rates, insurance, property management fees, eligible body corporate expenses and repairs may also be deductible depending on the nature of the expense.
From the 2027-28 income year, the treatment of losses changes for established residential investment properties acquired after 7:30pm AEST on 12 May 2026. Losses on those properties will generally be able to offset income from other residential properties, including eligible residential capital gains, with excess losses carried forward to future years. They will generally no longer be deductible against non-residential income such as salary or wages. Properties held before the announcement are grandfathered, while eligible new builds continue to have access to negative gearing.
Capital gains tax treatment is also changing from 1 July 2027. The existing arrangements continue to apply to gains arising before that date, while gains arising from 1 July 2027 will be subject to the new inflation-based arrangements and minimum tax rules. Investors in eligible new builds will be able to choose between the existing 50% CGT discount and the new arrangements.
Independent tax advice should be obtained regarding how these rules apply to your circumstances.
Serviceability and Income Assessment for Rental Property
Lenders generally assess only a portion of the expected rental income when calculating borrowing capacity rather than using the full weekly rent. The percentage recognised varies between lenders and can also depend on the property and the type of rental income being assessed.
Your income doesn't necessarily need to cover the full repayment on its own because eligible rental income contributes towards the lender's serviceability assessment. If you're purchasing in South Brisbane, the lender's own rental income assessment will still apply regardless of current local rental conditions.
APRA-regulated banks currently assess residential mortgage serviceability using a buffer of at least 3 percentage points above the loan interest rate. For example, a loan with an interest rate of 6% would generally need to be assessed at a rate of at least 9%, subject to the lender's own assessment rate and policies. The buffer applies to new residential lending, including refinancing and increases to existing lending where the application is subject to a new serviceability assessment.
Non-bank lenders are not automatically subject to APRA's bank serviceability buffer and may apply different assessment methodologies.
Offset Accounts and Loan Features for Investors
An offset account linked to your investment loan reduces the interest charged on the loan without reducing the underlying loan principal. If you have a loan of $500,000 and $30,000 in a fully offsetting account, you're generally charged interest on the $470,000 net balance.
Because the offset reduces the amount of interest you actually incur, it also reduces the amount of interest potentially available as a tax deduction. The benefit is that the $30,000 remains accessible in the separate offset account while the underlying loan balance remains unchanged.
This can be important for investment property lending because withdrawing your own money from an offset account is different from redrawing money that has previously been paid directly into the loan. A redraw is treated as a new borrowing for tax purposes, and the deductibility of the interest attributable to that amount depends on how the redrawn funds are used.
If redrawn funds are used partly for investment purposes and partly for private purposes, the loan can become a mixed-purpose loan and the interest may need to be apportioned between deductible and non-deductible purposes.
Not all investment loan products include an offset account, particularly fixed rate loans. If an offset is important to your strategy, confirm that the loan product supports it before applying. Some lenders charge a higher rate or annual fee for loans with offset facilities.
When to Consider Refinancing an Investment Loan
If your current loan no longer suits your circumstances, or if you're paying a higher rate than what's available elsewhere, refinancing can potentially reduce your interest costs or provide access to different loan features. Investors may also refinance to access equity for a second purchase, restructure their lending or change their repayment structure.
Refinancing creates a new loan application, which means the lender reassesses your income, existing debts and serviceability under current policy settings. If your circumstances have changed since the original loan was approved, such as a reduction in income or an increase in other debts, you may not be offered the same loan amount or structure.
If you're refinancing out of a fixed rate loan before the fixed period ends, break costs may apply. The amount depends on the particular loan, how much time remains on the fixed term and movements in relevant interest rates. Your broker can request a break cost estimate from the existing lender before you commit to refinancing.
Ready to Review Your Investment Loan Options?
Whether you're purchasing your first rental property, expanding an existing portfolio or reviewing the structure of an investment loan, Wealthcove can assess your borrowing capacity and compare investment loan options across banks and specialist lenders 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 property finance options.
Sources & References
Australian Prudential Regulation Authority – Mortgage serviceability buffer and high debt-to-income lending limits.
Australian Treasury – Budget 2026-27 tax changes, including negative gearing and capital gains tax reforms.
Australian Taxation Office – Rental property expenses and interest deductions.
Australian Taxation Office – Tax treatment of redraws and mixed-purpose loan accounts.
