Understanding the basics of property investment loans

Investment property finance works differently from the loan you use to buy your own home.

The interest rate, deposit requirements, and loan structure all change when you shift from owner-occupier to investor. Lenders assess rental income against your borrowing capacity, and your choice between interest only and principal and interest repayments affects your cash flow and tax position. Getting the structure wrong can cost you thousands over the life of the loan.

Templestowe sits in a well-established pocket of Melbourne's eastern suburbs, bordered by the Yarra River and Ruffey Creek. Many residents here already own property and are looking at either their first investment purchase or adding to an existing portfolio. The area's proximity to Westfield Doncaster, strong school catchments, and consistent rental demand make it a natural starting point for conversations about property investment strategy.

How lenders assess your borrowing capacity as an investor

Lenders typically assess 80% of the expected rental income when calculating how much you can borrow for an investment property. They discount the full rent to account for periods of vacancy, maintenance costs, and the fact that rental income is not as reliable as salary.

Consider someone earning a combined household income of $160,000 who wants to buy a unit in Bulleen as an investment. The property generates $550 per week in rent, but the lender will only count $440 of that towards borrowing capacity. The loan application must show that existing commitments, the new loan repayment, and living expenses can all be serviced from salary plus that reduced rental figure. Even if the property is tenanted and cash flow positive, the lender's assessment is more conservative than the real-world position.

Your borrowing capacity also depends on whether you structure the loan as interest only or principal and interest. Interest only repayments are lower, which means you can borrow more on paper. But that option is not always available depending on your loan to value ratio and the lender's current appetite for investor lending.

Deposit and equity requirements for investment loans

Most lenders require a minimum 10% deposit for an investment property, though some will lend at 90% loan to value ratio with Lenders Mortgage Insurance. If you want to avoid paying LMI, you need at least 20% deposit or equity.

Many Templestowe buyers use equity from their family home rather than cash savings. If your home is valued at $1.2 million and you owe $400,000, you have $800,000 in equity. Lenders will typically allow you to borrow up to 80% of that equity, which gives you $560,000 in usable equity after accounting for the existing loan. That amount can cover both the deposit and purchase costs on an investment property without needing to sell or save further.

The other option is refinancing to release equity, which means increasing your home loan and using the additional funds as a deposit. This keeps your loans separate and makes it easier to track deductible interest, particularly if you later decide to convert your home into an investment property or vice versa.

Interest rate structures and why investors often choose interest only

Investor interest rates are typically 0.20% to 0.40% higher than owner-occupier rates. Lenders price in the additional risk that comes with investment lending, and that difference applies whether you choose variable or fixed rate options.

Interest only loans are common for property investors because the repayments are lower and all the interest is tax deductible. If you borrow $600,000 at current variable rates on an interest only basis, your repayments might sit around $3,000 per month. The same loan on principal and interest would be closer to $3,600. That difference matters when you are trying to hold multiple properties or manage cash flow across a portfolio.

Interest only periods typically run for five years, after which the loan converts to principal and interest unless you apply to extend. Not all lenders will extend interest only terms, particularly if your loan to value ratio has increased or your financial position has changed. Planning for that conversion is part of structuring the loan correctly from the outset.

Understanding negative gearing and the tax treatment of investment property

Negative gearing allows you to offset the net loss from your investment property against your other income, reducing your taxable income and the amount of tax you pay. If your property costs $35,000 per year to hold and generates $28,000 in rent, the $7,000 shortfall can be claimed as a deduction.

Recent changes announced in the Federal Budget mean that negative gearing will be restricted for established residential properties purchased after 12 May 2026. From 1 July 2027, losses on those properties can only be offset against other residential property income or capital gains, not against salary or wages. Losses can still be carried forward, but the immediate tax benefit is removed. New builds remain eligible for full negative gearing under the existing rules, which makes them more attractive from a tax perspective.

The Capital Gains Tax discount is also changing. From 1 July 2027, the current 50% discount will be replaced with an inflation-based calculation and a minimum 30% tax on gains for properties acquired after Budget night. Investors who bought before 12 May 2026 are not affected, and those buying new builds can choose between the old and new arrangements.

How to structure loans across multiple properties

Once you move beyond your first investment property, loan structure becomes more important. Keeping each property loan separate makes it easier to sell one without affecting the others, and it allows you to refinance individual loans as rates or circumstances change.

Some investors split their borrowing across multiple lenders to avoid concentration risk. If one lender tightens their credit policy or refuses to extend interest only terms, you still have other loans unaffected by that decision. It also means you can take advantage of different lenders' strengths, such as one offering lower rates and another providing more flexible offset or redraw features.

Expanding your property portfolio requires careful attention to how each new loan interacts with your existing debt. Lenders assess your entire financial position every time you apply for a new loan, and your ability to borrow decreases as your commitments increase. Structuring loans correctly from the beginning gives you more options as your portfolio grows.

What happens when your fixed rate expires or you need to refinance

Many investors lock in a fixed interest rate when they first purchase, particularly if they want certainty around cash flow. When that fixed period ends, the loan typically reverts to a variable rate, which may be higher than the rate you were paying.

Refinancing to a new lender or renegotiating with your existing lender is worth considering at that point. Rates and loan features change, and the product that suited you three years ago may no longer be the most appropriate option. Refinancing also allows you to access equity if your property has increased in value, which can be used as a deposit for your next purchase.

The refinancing process for investment loans is similar to applying for a new loan. Lenders will reassess your income, expenses, and rental income, and you may need a current valuation of the property. Some lenders charge break costs if you refinance during a fixed term, so timing matters.

Property investment is not a set-and-forget strategy. Your loan structure, rate, and repayment type should be reviewed regularly as your financial position and goals change. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions