Investment Loans & What Not to Overlook

Understanding Investment Loans After the Budget Changes

An investment loan is a mortgage used to purchase property you intend to rent out rather than live in. The loan structure is similar to a standard home loan, but lenders assess your application differently because rental income and potential vacancies factor into your borrowing capacity.

The recent federal budget introduced changes to negative gearing and capital gains tax that took effect from 1 July 2027. These changes only apply to established residential properties purchased after 12 May 2026. If you bought your investment property before that date, your existing arrangements are largely grandfathered. If you are considering an established property now, rental losses can only be offset against future rental income or capital gains from residential property, not your salary. New builds remain unaffected by these restrictions, which makes them more appealing from a tax perspective if you are buying after the budget announcement.

Consider someone earning $120,000 annually who purchases an established property that runs at a $10,000 annual loss. Under the old rules, that loss could reduce their taxable income immediately. Under the new rules, the loss can only be carried forward to offset future rental income or capital gains. That changes the cash flow picture in the early years and makes projections more important before you commit.

How Lenders Assess Investment Loan Applications

Lenders assess investment loan applications by calculating your borrowing capacity with rental income included, but they typically only count 80% of the expected rent to account for vacancies and maintenance periods. They also add the proposed loan repayment to your existing commitments, so even though you are generating rental income, the loan still affects how much you can borrow in future.

In our experience, PAYG professionals often underestimate how an investment loan impacts their borrowing capacity for a future owner-occupied property. If you plan to upgrade your home within a few years, the investment loan sits on your serviceability even if the property is positively geared. That means the amount you can borrow for your next home may be lower than expected, particularly if you have structured the investment loan as interest-only and the lender assesses it on a principal and interest basis.

A client earning $140,000 with no dependents applied for an investment loan on a unit generating $600 per week in rent. The lender counted $480 per week as income, then assessed the loan repayment at principal and interest rates even though the loan was interest-only. The net effect reduced their future borrowing capacity by around $80,000 compared to what they assumed, which delayed their plans to buy a larger family home.

Interest-Only Versus Principal and Interest Repayments

Interest-only repayments mean you only pay the interest charged each month without reducing the loan balance. Principal and interest repayments include both interest and a portion of the loan amount, so the balance reduces over time.

Most investors choose interest-only terms because the repayments are lower, which improves cash flow and allows them to claim the full interest amount as a deduction. Lenders typically offer interest-only periods of up to five years, after which the loan reverts to principal and interest unless you request an extension. Not all lenders approve extensions automatically, and criteria have tightened in recent years, so it is worth understanding your lender's policy before you rely on ongoing interest-only terms.

If you are using rental income to service the loan and your cash flow is already tight, the jump from interest-only to principal and interest can add several hundred dollars per month to your repayment. For a $500,000 loan, the difference might be $400 to $500 per month depending on the rate. If the rental income does not cover that increase, you will need to fund the shortfall from your salary, which affects your capacity to hold the property or pursue further investments.

Variable Versus Fixed Rate Investment Loans

Variable rate loans allow you to make extra repayments, redraw funds, and benefit from rate cuts when they occur. Fixed rate loans lock in a rate for a set period, usually one to five years, which provides repayment certainty but limits flexibility.

For investment properties, variable rates are often preferred because rental income can fluctuate and you may want access to offset accounts or redraw facilities to manage cash flow. Fixed rates can work if you want certainty over your deductions and repayments, but if you need to sell or refinance during the fixed period, break costs can apply. These costs are calculated based on the difference between your fixed rate and the current wholesale rate, and they can run into thousands of dollars if rates have fallen.

Some investors use a split loan structure, fixing a portion of the loan for certainty and keeping the rest variable for flexibility. That approach can work if you want to hedge against rate rises without losing access to features like offset accounts, which are rarely available on fixed rate portions. If you are considering refinancing an existing investment loan, check whether your current loan has a fixed component and what the break costs might be before you proceed.

Loan to Value Ratio and Deposit Requirements

Lenders typically allow you to borrow up to 90% of the property value for an investment loan, but most cap lending at 80% to avoid Lenders Mortgage Insurance (LMI). LMI is a one-off fee that protects the lender if you default, and it can add thousands to your upfront costs without providing any benefit to you as the borrower.

A 20% deposit on a $600,000 property is $120,000, which is often the barrier for professionals looking to enter the investment market. If you already own a home with equity, you may be able to use that equity as part or all of your deposit without selling. Lenders will assess your overall loan to value ratio across both properties, and you will need to demonstrate that you can service both loans, but this approach allows you to retain your home while expanding your portfolio.

If you are considering using equity from your current home, speak to a broker who can structure the loans correctly. Cross-collateralised loans can limit your flexibility later, so splitting the loans and securing each property separately is often a better long-term strategy. We regularly see investors who cross-collateralised early on and then faced complications when they wanted to sell one property or refinance individually.

Claimable Expenses and Tax Deductions

Investment property expenses that relate to earning rental income are generally tax deductible. That includes loan interest, property management fees, council rates, strata fees, insurance, repairs, and depreciation on the building and fixtures.

Under the new budget rules, if you bought an established property after 12 May 2026, any net rental loss can only be offset against future rental income or capital gains from residential property. The loss is not lost entirely but carried forward. If you bought before that date or you are purchasing a new build, the old rules still apply and you can offset rental losses against your salary.

Depreciation is a non-cash deduction that can reduce your taxable income without affecting your cash flow. A quantity surveyor prepares a depreciation schedule that outlines the deductions you can claim each year. For new builds, depreciation is more generous, which is another reason they remain attractive post-budget. For established properties, depreciation on plant and equipment like ovens and air conditioners can still apply, but you cannot claim depreciation on items the previous owner installed if the property was purchased after recent changes to depreciation rules.

Choosing the Right Investment Loan Structure

The loan structure you choose should match your investment strategy and cash flow needs. If you plan to hold the property long-term and build equity, a principal and interest loan will reduce your debt over time. If you want to maximise cash flow and deductions, an interest-only loan with an offset account linked to your rental income can help you manage funds efficiently.

Offset accounts linked to investment loans do not reduce your deductions because the loan balance remains unchanged, but they give you access to surplus funds without needing to redraw. Some lenders charge higher rates for loans with offset accounts, so compare the cost of the feature against the benefit. If the rate difference is 0.10% to 0.15%, the offset may still be worthwhile for the flexibility it provides, particularly if your rental income fluctuates or you want a buffer for vacancies and repairs.

If you are planning to build a portfolio rather than purchase a single property, keeping your loans separate and avoiding cross-collateralisation will give you more control. This structure allows you to refinance or sell individual properties without affecting the others, and it keeps your borrowing capacity clearer when you apply for additional loans. Structuring your loans correctly from the start saves time and cost later, and it is something a broker can help you plan before you submit your first application.

Call one of our team or book an appointment at a time that works for you. We can help you compare investment loan options from lenders across Australia and structure your finance to suit your property and tax position.

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