Everything You Need to Know About Investment Loans

An investment loan lets you borrow to purchase a residential property that you rent out rather than live in.

Lenders treat these loans differently to owner-occupier mortgages because the risk profile is different. You'll typically pay a slightly higher interest rate, face tighter serviceability checks, and need a larger deposit. But you also gain access to tax deductions on interest and holding costs, and the opportunity to build long-term wealth through property.

What Deposit Do You Need for an Investment Property?

Most lenders require a minimum 10 per cent deposit for an investment property, though some will lend with as little as 5 per cent if you're prepared to pay Lenders Mortgage Insurance.

LVR matters more than the dollar figure. A lender lending at 90 per cent LVR on an investment property will charge LMI and apply a higher risk weight to the loan, which usually translates to a higher rate or reduced loan amount. If you can contribute 20 per cent or more, you'll avoid LMI and gain access to better investor interest rates.

Consider someone refinancing their owner-occupied home to release equity for a deposit on an investment property. If the existing home is valued high enough, they might pull out a 20 per cent deposit without needing to save cash. That equity release strategy is common in Tasmania, where many buyers already own a home in Hobart or Launceston and want to add a second property to their portfolio. The refinance itself doesn't attract LMI if the combined LVR on the existing property stays under 80 per cent, and the investment property loan can be structured separately.

How Lenders Assess Your Borrowing Capacity

Lenders assess investment loan applications using rental income, but they don't count every dollar you'll receive.

Most lenders apply a shading factor to rental income, typically accepting only 70 to 80 per cent of the expected rent to account for vacancy periods and maintenance costs. They also add a serviceability buffer of 3.0 percentage points above the loan product rate, as required by APRA. That buffer has been in place since October 2021 and applies to all new borrowing from authorised deposit-taking institutions.

If you're applying for an investment loan and you already have other debts, the debt-to-income ratio limit introduced in February 2026 may come into play. Lenders can approve up to 20 per cent of new investor loans to borrowers with a DTI of six times or more, but anything beyond that threshold requires the lender to stay within its quarterly quota. In our experience, borrowers with DTI close to or above six often need to reduce other commitments or increase their deposit to stay within policy.

Interest Only or Principal and Interest?

Interest-only investment loans let you pay only the interest portion of the loan for an agreed period, usually one to five years.

That structure keeps repayments lower and can improve cash flow if the rental income doesn't quite cover a principal-and-interest payment. Many investors choose interest-only because they plan to use surplus cash flow to pay down non-deductible debt like their owner-occupied home loan, or to save for the next property deposit.

Under APS 112, a long-term interest-only residential loan is classified as non-standard if the LVR exceeds 80 per cent and the contractual interest-only period is more than five years or unspecified. That classification affects the lender's capital requirements and may limit your options. Most lenders cap interest-only periods at five years for investment loans above 80 per cent LVR, then convert the loan to principal and interest.

If your strategy relies on keeping repayments low while you hold multiple properties, you'll want to plan ahead for the reversion to principal and interest. A borrower with three investment properties on interest-only terms who doesn't prepare for the reversion may find their serviceability tightens significantly when all three loans flip to principal and interest within the same 12-month window.

Variable or Fixed Interest Rates?

Variable rate investment loans move with the lender's standard rate, which usually follows the Reserve Bank cash rate over time.

Fixed rate investment loans lock your rate for a set term, typically one to five years. The trade-off is certainty versus flexibility. Variable loans let you make extra repayments or redraw without penalty. Fixed loans generally restrict extra repayments and charge break costs if you exit early, refinance, or sell the property during the fixed term.

Some investors split their loan, fixing a portion and leaving the rest variable. That approach spreads the risk and gives you access to offset accounts and redraw on the variable portion while keeping part of your repayment predictable. If you're holding a property long-term in an area with steady rental demand, a split structure can make sense. If you're planning to renovate or sell within two years, locking in a fixed rate may cost you more than the certainty is worth.

Tax Deductions and Negative Gearing: What Changed in 2026

Interest on an investment loan is tax deductible as long as the property is rented or genuinely available for rent.

For properties you already owned or had under contract at 7:30pm AEST on 12 May 2026, nothing has changed. Losses from those properties can still be deducted against your salary, business income, or other assessable income. The same treatment applies if you buy an eligible new build, which includes dwellings constructed on vacant land or developments that increase the number of dwellings on a site.

For established investment properties acquired after 12 May 2026, losses can only be offset against income from other residential investment properties from the 2027-28 income year onward. If your property runs at a loss and you have no other property income to offset it against, you carry the loss forward and claim it in a future year when you do have property income, including a capital gain when you sell. This doesn't affect your ability to deduct interest or other expenses. It only affects what income you can offset those deductions against.

As an example, a Hobart investor who bought an established apartment in Sandy Bay in August 2026 and negatively gears it by $8,000 per year will be able to deduct that loss against their wage income for the 2026-27 year only. From 2027-28 onward, they'll carry the loss forward unless they have income from another residential investment property. If they sell the apartment in five years and make a capital gain, the carried-forward losses reduce the taxable gain.

Capital Gains Tax: Indexation and the 30 Per Cent Minimum Rate

From 1 July 2027, the way capital gains are taxed on investment properties changes.

For gains that accrue after that date, you index your cost base using CPI and pay tax on the real gain only, with a minimum rate of 30 per cent applied to the indexed gain. The 50 per cent discount still applies to gains that accrued before 1 July 2027. If you own the property across both periods, you split the gain and apply the old rules to the pre-July 2027 portion and the new rules to the portion after.

Eligible new builds get a choice. You can use either the old 50 per cent discount or the new indexation and minimum rate, whichever gives you the lower tax bill when you sell. For properties in areas with strong inflation-adjusted growth, indexation may deliver a lower taxable gain than the discount. For properties that appreciate more slowly, the discount might remain the option to take.

If you're on the Age Pension, Disability Support Pension, or certain other government payments in the year you sell, the 30 per cent minimum rate doesn't apply to you. That carve-out was included in the Income Tax Rates Amendment (Tax Reform No. 1) Act 2026.

Foreign Investment Rules and the Established Dwelling Ban

Foreign persons, including temporary residents, are banned from purchasing established dwellings in Australia from 1 April 2025 to 30 June 2029.

Limited exceptions exist for developments that increase housing supply, Build to Rent projects, and employers bringing workers under the Pacific Australia Labour Mobility scheme. Permanent residents and New Zealand citizens remain exempt. Temporary residents can still apply for approval to purchase new dwellings or vacant land, and if they buy vacant land, they're required to complete construction within four years and not sell until construction is finished.

Application fees for the few exceptions that still allow foreign purchase of established dwellings were tripled from 1 April 2025. Foreign owners who hold residential property without occupying it or making it available for rent for at least 183 days per vacancy year must pay an annual vacancy fee, which is now double the foreign investment application fee that applied to the purchase.

These rules don't affect Australian citizens or permanent residents, but they do reduce competition in the established dwelling market from offshore buyers. In areas like Hobart and Launceston, where foreign investor activity was never as high as in Sydney or Melbourne, the practical impact has been limited. Most of the change has been felt in the new dwelling and vacant land segment.

Loan Features That Matter for Property Investors

Offset accounts, redraw facilities, and the ability to make extra repayments all affect how much interest you pay over the life of the loan.

An offset account is a transaction account linked to your investment loan. Every dollar in the offset reduces the balance on which interest is calculated. Offset accounts are typically only available on variable rate loans. Redraw lets you withdraw extra repayments you've made, but not all lenders offer redraw on investment loans, and some charge fees or impose minimum redraw amounts.

If you're planning to build a portfolio, loan portability and the ability to increase your limit without a full reapplication can save time and cost. Some lenders let you port your investment loan to a new property without rewriting the contract or paying discharge fees. Others allow you to apply for a limit increase using the equity in your existing property as additional security.

We regularly see investors underestimate the value of flexible features until they need them. A borrower who wants to sell one property and buy another within a short window benefits from portability. A borrower who wants to renovate or subdivide benefits from redraw or a construction loan top-up without needing a full refinance.

What Happens If You Can't Meet Repayments?

If your tenant moves out and you can't cover the repayment from your own income, contact your lender immediately.

Under section 72 of the National Credit Code, you can give your lender a hardship notice, verbally or in writing, if you're unable to meet your obligations. The lender has 21 days to request further information and must respond within 21 days of receiving it. They can agree to change the contract, such as switching from principal and interest to interest-only, pausing repayments temporarily, or extending the loan term.

Hardship provisions apply only to regulated credit contracts. If you've borrowed through a company or the loan is predominantly for business purposes, the National Credit Code doesn't apply and you'll need to negotiate directly with your lender outside that framework.

Vacancy risk is one reason lenders shade rental income when assessing your application. If you're investing in an area with high vacancy rates or seasonal demand, factor that into your cash flow planning before you commit. Holding three to six months of repayments in reserve is a common buffer, particularly in regional markets where tenant turnover can be less predictable than in metro areas.

How to Compare Investment Loan Options

Rate is important, but it's not the only factor.

Two loans with the same advertised rate can have very different costs once you account for application fees, ongoing fees, LMI, and the features you actually need. A loan with a slightly higher rate but no ongoing monthly fee and full offset may cost less over five years than a loan with a lower rate, a $15 monthly account fee, and no offset.

When comparing investment loan options, look at the comparison rate, but also consider how you'll use the loan. If you plan to keep a large balance in offset, a loan that offers 100 per cent offset is worth more to you than one that offers partial offset, even if the advertised rate is identical. If you plan to fix, check the break cost formula and whether the lender uses a published swap rate or an internal rate to calculate the cost.

A broker can show you how different lenders assess rental income, whether they'll accept rental income from a property you're about to buy, and which lenders allow you to borrow for a property in a regional area or a unit in a high-density building. Not all lenders treat every property type the same way, and postcodes matter more than most borrowers expect.

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

Frequently Asked Questions