Understanding the basics of property investment loans

Property investment loans work differently from home loans

An investment loan is structured around income the property generates, not just your salary. Lenders assess rental yield, serviceability with a buffer, and the likelihood the property will remain tenanted. The rate you pay, the deposit you need, and the repayment type all differ from an owner-occupied mortgage.

Shoreham sits within a market where coastal properties can experience seasonal vacancy. That volatility matters. A lender pricing an investment loan for a property on the Peninsula will look at comparable rental demand, particularly during off-peak months, and factor that into serviceability. If rental income drops below the assumed amount during assessment, your buffer narrows.

Consider a buyer with a townhouse in Camberwell looking to purchase a second dwelling near the coast as a long-term rental. The buyer earns $140,000 and has $180,000 in available equity. The Peninsula property is listed within the current median range for Shoreham. The lender applies a rental yield assumption, adds the serviceability buffer, and includes a notional vacancy allowance. Even with strong equity, borrowing capacity comes back lower than expected because the rental income isn't weighted as heavily as salary. The loan amount approved is capped at around 75 per cent of the property value unless Lenders Mortgage Insurance is paid.

Interest rates differ for investment borrowing

Lenders charge a margin above the equivalent owner-occupier rate for investment loans. That margin typically sits between 0.20 and 0.50 percentage points depending on the loan-to-value ratio and lender. The higher the LVR, the wider the margin.

You can choose variable or fixed. Variable gives access to offset accounts and allows unlimited extra repayments. Fixed locks the rate but removes flexibility during the fixed term. Some investors split the loan across both structures to manage rate risk while keeping liquidity. If you expect rental income to vary or plan to pay down debt unevenly, variable tends to suit better. If cash flow is predictable and you want certainty on repayments, fixed can work.

Rate discounts are available, but they're negotiated product by product and lender by lender. A portfolio investor with multiple properties and low LVRs may access deeper discounts than a first-time buyer at 90 per cent LVR. Your broker submits the loan with context around your full position to improve pricing.

Deposit and LVR shape your loan options

Most lenders cap investment loans at 90 per cent LVR. A smaller group will lend at 95 per cent in limited scenarios. Anything above 80 per cent LVR requires Lenders Mortgage Insurance, which is a one-off premium added to the loan or paid upfront. LMI on an investment property costs more than on an owner-occupied purchase at the same LVR.

If you're using equity from an existing property rather than cash savings, the same LVR rules apply across your total portfolio. Releasing equity to fund a deposit means your existing property is re-assessed, and the combined debt position is serviceability tested. In our experience, buyers underestimate how much usable equity they actually have once the lender applies an 80 per cent cap to avoid LMI on the new loan.

Interest-only repayments and cash flow management

Interest-only investment loans allow you to pay only the interest component for a set period, typically one to five years. Your loan balance doesn't reduce, but monthly repayments are lower. That structure can improve cash flow if rental income doesn't cover principal and interest repayments, or if you'd rather direct surplus cash elsewhere.

When the interest-only period ends, the loan reverts to principal and interest unless you request an extension. Not all lenders automatically approve extensions, particularly if your circumstances have changed or the LVR has drifted higher due to a valuation drop. Plan for reversion before it happens.

Interest-only doesn't suit every investor. If your goal is to pay down debt and build unencumbered equity, principal and interest from the start makes more sense. If you're focused on portfolio growth and want to preserve cash for the next purchase, interest-only gives breathing room. The structure should match the strategy, not the other way around.

Negative gearing and the changes from July 2027

Negative gearing allows you to offset a rental loss against other income like your salary. If your investment property costs more to hold than it generates in rent, that loss reduces your taxable income. Many investors rely on this to make the numbers work in early years while waiting for capital growth or rental increases.

From 1 July 2027, new rules quarantine rental losses on most residential properties acquired after 12 May 2026. You can still claim the loss, but only against other residential rental income or future capital gains from residential property. You can't offset it against salary. Properties purchased before that date, or eligible new builds, remain unaffected. If you're planning to buy an established dwelling on the Peninsula as an investment, the structure of your tax position changes materially depending on timing.

An investor purchasing a Shoreham property after the cut-off who expects to negatively gear by $12,000 per year will no longer see that flow through as a tax refund unless they own other rental properties generating positive income. The loss is banked and used later. Cash flow tightens in the short term even though the tax position evens out over time when the property is sold.

Capital gains tax and the indexation shift

When you sell an investment property, capital gains tax applies to the profit. Under the current system, individuals receive a 50 per cent discount on the gain if the property is held for more than 12 months. From 1 July 2027, that discount is replaced with cost base indexation and a minimum 30 per cent tax rate on real gains for properties acquired after the transition date.

Gains accrued before 1 July 2027 on properties you already own are unaffected. The change applies only to gains made after that date. If you buy a new residential dwelling that qualifies as an eligible new build, you can choose between the discount method and indexation. For established property purchases, indexation is the only option going forward.

The shift doesn't eliminate the tax, but it changes how the gain is calculated and what rate applies. Investors with longer hold periods may benefit from indexation if inflation is high. Those planning shorter holds lose the simplicity of the 50 per cent discount. Speak with your accountant before assuming your post-sale tax position.

Borrowing serviceability under the current DTI settings

From February 2026, lenders operate under debt-to-income caps set by APRA. No more than 20 per cent of new investment loans can be written at a DTI of six times income or higher. That cap applies across each lender's portfolio, not to your individual application, but it influences how lenders assess borderline cases.

Serviceability is tested at the loan rate plus a three percentage point buffer. Rental income is included but shaded, usually at 80 per cent of the assessed amount to account for vacancy and management costs. The DTI measure compares your total debt to your gross income. If you already hold debt against your owner-occupied property, that's included in the calculation even if it's performing.

We regularly see this play out with Peninsula buyers. A household earning $160,000 with an existing $640,000 mortgage sits at a DTI of four. Adding a $400,000 investment loan pushes total debt to $1,040,000 and DTI to 6.5. That loan may still be approved depending on the lender's current portfolio mix, but it's no longer automatic. Some lenders will decline. Others will approve at a higher rate or lower LVR.

Choosing loan features that suit long-term plans

Offset accounts, redraw facilities, and portability all matter when you're holding a loan for ten or fifteen years. An offset account linked to your investment loan allows you to park surplus cash and reduce interest without paying down the principal. That keeps the debt balance high, which maximises your tax deduction, and preserves flexibility.

Redraw lets you pull back extra payments you've made, but not all lenders offer it on investment loans, and some charge fees or slow down access. Portability allows you to transfer the loan to a different property if you sell and buy another investment within a short window. Not every lender supports it.

If you're planning to build a portfolio rather than hold one property long term, refinancing becomes part of the strategy. Loan features that looked minor at settlement start to matter when you're trying to access equity again or move lenders for a lower rate. Structure the first loan with the second purchase in mind.

Your next step is a conversation about your specific position, not a generic loan comparison. Call one of our team or book an appointment at a time that works for you.

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