Investment Property Loans
A comprehensive guide to financing investment properties
In this guide
Investment Loan Basics
Investment property loans are specifically designed for purchasing properties you intend to rent out. They differ from owner-occupied loans in several key ways.
Key Differences from Owner-Occupied Loans
- ↑ Higher interest rates: Typically 0.25-0.60% higher than owner-occupied
- ↑ Larger deposit required: Usually minimum 20% to avoid LMI
- ✓ Tax deductible interest: Loan interest is tax deductible
- ✓ Interest-only options: More readily available for investors
Loan Types for Investors
Principal & Interest
Pay down loan over time, building equity but higher repayments
Interest Only
Lower repayments, maximize tax deductions, but no equity from repayments
Lending Requirements
Income Assessment
Lenders typically include 70-80% of projected rental income in serviceability calculations. You'll need to demonstrate you can afford repayments even with vacancy periods.
What Lenders Look For
1. Strong Serviceability
- Stable employment history (2+ years preferred)
- Good income relative to total debt
- Existing property performance (if applicable)
- Cash reserves for emergencies
2. Property Suitability
- Location with strong rental demand
- Property type and size appropriate for area
- Realistic rental appraisal
- Good condition requiring minimal work
3. Experience & Strategy
- Clear investment strategy
- Understanding of landlord obligations
- Property management arrangements
- Exit strategy consideration
Deposit & Equity
Minimum Deposit Requirements
| LVR | Deposit | Notes |
|---|---|---|
| Up to 80% | 20% | No LMI required |
| Up to 90% | 10% | LMI required, limited lenders |
| Up to 95% | 5% | Rarely available for investors |
Using Equity from Existing Property
Equity Access Strategy
Many investors use equity in their home or other properties as deposit for investments:
- • Home value: $800,000
- • Current loan: $400,000
- • Available equity (80% LVR): $240,000
- • Usable for deposit & costs: Up to $240,000
Deposit Sources
- Genuine savings (preferred by lenders)
- Equity from existing property
- Gift from family (with gift letter)
- Inheritance or asset sale
- First Home Owner Grant (if eligible)
Tax Considerations
Important Note
Tax laws are complex and change frequently. Always consult with a qualified tax professional or accountant for advice specific to your situation.
Tax Deductible Expenses
Immediately Deductible
- Loan interest
- Property management fees
- Council rates
- Insurance premiums
- Repairs and maintenance
- Strata fees
- Water charges
- Land tax
Depreciation (Over Time)
- Building structure (2.5% per year)
- Fixtures and fittings
- Appliances
- Carpets and blinds
- Air conditioning
- Hot water systems
Negative Gearing
When rental income is less than property expenses, you can offset the loss against other income, reducing your tax bill.
Example (Simplified):
- Rental income: $25,000/year
- Total expenses: $35,000/year
- Loss: $10,000
- Tax saving (37% bracket): $3,700
Investment Strategies
Capital Growth Strategy
Focus on properties in high-growth areas, accepting lower rental yields for potential capital appreciation.
- Target inner-city or gentrifying suburbs
- Accept negative gearing in early years
- Suitable for high-income earners
- Long-term wealth building focus
Cash Flow Strategy
Prioritize properties with high rental yields to generate positive cash flow.
- Regional areas or outer suburbs
- Focus on rental return over growth
- Suitable for those needing income
- Lower entry prices typically
Value-Add Strategy
Buy properties below market value and improve them to increase rent and value.
- Renovate to improve appeal
- Subdivide or develop
- Add granny flats
- Requires time and expertise
Buy and Hold
Long-term strategy focusing on quality properties in stable areas.
- Blue-chip suburbs
- Quality tenants
- Minimal management
- Compound growth over decades
Costs & Cash Flow
Initial Purchase Costs
Budget for these upfront costs on a $500,000 investment property:
- • Stamp duty: $15,000-25,000 (varies by state)
- • Legal fees: $1,500-2,500
- • Building inspection: $400-800
- • Loan costs: $600-1,500
- • Total: $17,500-30,000+ (3.5-6% of purchase price)
Ongoing Costs
Fixed Costs
- Loan repayments
- Council rates
- Strata fees (if applicable)
- Insurance
- Property management
Variable Costs
- Repairs and maintenance
- Vacancy periods
- Property upgrades
- Tenant changeover costs
- Rate increases
Cash Flow Analysis Example
| $500,000 Property Example (Annual) | |
|---|---|
| Rental Income | +$26,000 |
| Interest (6% on $400k) | -$24,000 |
| Property Management (7%) | -$1,820 |
| Council Rates | -$1,800 |
| Insurance | -$1,200 |
| Maintenance | -$2,000 |
| Pre-tax Cash Flow | -$4,820 |
Common Pitfalls
1. Buying on emotion rather than numbers
Investment decisions should be based on data, not feelings about a property.
2. Underestimating ongoing costs
Always budget for vacancies, maintenance, and unexpected repairs.
3. Poor property management
Saving on management fees can cost more in vacant periods and property damage.
4. Over-leveraging
Borrowing too much leaves no buffer for rate rises or income changes.
5. Ignoring location fundamentals
Growth relies on jobs, infrastructure, and population growth in the area.
6. Not getting proper advice
Skipping professional advice on tax, legal, and financial matters.
Building a Portfolio
Portfolio Growth Strategy
Successful property portfolios are built systematically over time:
- Start conservatively: First investment should be low-risk
- Build equity: Through capital growth and loan repayments
- Refinance strategically: Access equity for next purchase
- Diversify: Different locations and property types
- Review regularly: Sell underperformers, keep winners
Lender Considerations for Multiple Properties
- Some lenders have limits on total investment lending
- Serviceability gets harder with each property
- Consider using different lenders to spread risk
- Keep detailed records of all properties
- Maintain good relationships with brokers
Timeline Example
Year 1-2: First Investment
$500k property, focus on learning and stability
Year 3-5: Second Property
Use equity from first, possibly different strategy
Year 5-8: Consolidate or Expand
Review portfolio performance, refinance, possibly add third
Year 10+: Optimize
Sell underperformers, focus on quality, consider commercial
Find Your Perfect Mortgage in Minutes
Our RateReviewGuide Assistant analyzes your financial situation and instantly matches you with the best home loan options from Australia's top lenders.
No commitment required • Free to use • Results in seconds
Key Takeaways
- • Investment loans have higher rates but offer tax benefits
- • 20% deposit avoids LMI and gets better rates
- • Choose strategy based on your goals and tax situation
- • Budget for all costs, not just the mortgage
- • Get professional advice before investing
Disclaimer: This guide provides general information about investment property loans. Property investment carries risks and tax implications vary by individual circumstances. Always seek independent financial, tax, and legal advice before making investment decisions.