What are Investment Loans and How Do They Work?

What Is an Investment Loan?

An investment loan is a mortgage used to purchase a property you intend to rent out rather than live in. Lenders treat these differently to owner-occupier loans because the borrower typically relies on rental income as well as their own earnings to service the debt, and because the lender's security depends on a property that won't be occupied by the borrower.

Interest rates on investor loans are usually higher than on owner-occupier loans, typically by around 0.10 to 0.30 percentage points. The difference reflects the additional risk lenders assign to investment properties under the prudential framework. You'll also find that lenders apply tighter serviceability rules, including factoring in vacancy periods and body corporate fees if you're purchasing a unit or townhouse.

Consider someone buying a two-bedroom unit in Beaumaris, close to the shopping precinct and within walking distance of Beaumaris Primary School. The buyer has a 20 per cent deposit and intends to rent the property at current local rates. The lender will assess the application using a vacancy rate assumption (commonly 80 per cent of the gross rental income), add body corporate and insurance costs to the annual outgoings, and then test serviceability at an interest rate at least 3.0 percentage points above the actual loan rate. The buyer's salary, existing debts, and the estimated rental income after vacancies all feed into that calculation. If the numbers don't support the loan amount requested, the buyer may need to adjust the purchase target or increase the deposit to reduce the loan size. In this scenario, the buyer secured approval with a variable rate loan set to interest-only for the first five years, which kept the initial repayments lower while allowing full deductibility of the interest expense against rental income.

Deposit and Equity: How Much Do You Need?

Most lenders require a minimum deposit of 20 per cent for an investment property loan to avoid Lenders Mortgage Insurance. If you borrow with less than 20 per cent deposit, LMI premiums can add several thousand dollars to your upfront costs, and that premium is generally not tax-deductible because it relates to the capital aspect of the loan rather than the income-producing use.

If you already own property, you may be able to use equity rather than cash savings to fund the deposit and settlement costs. Equity release involves refinancing your current home and borrowing against the increased value, then using those funds as a deposit on the investment property. Lenders will assess your total borrowing capacity across both loans, including the additional debt and the new investment property's projected rental income.

Beaumaris has a mix of established homes and villa units, many of which attract steady rental demand from families and professionals working nearby. Because property values here sit above the Melbourne median, a 20 per cent deposit represents a substantial sum, and buyers often turn to equity in their existing home rather than waiting to accumulate cash savings. You'll need to account for stamp duty, conveyancing fees, building and pest inspections, and any lender fees when calculating your total funds required at settlement.

Interest-Only or Principal and Interest?

Investment loans can be structured as interest-only or principal and interest. With an interest-only loan, you pay only the interest portion each month for a set period, typically one to five years. Your loan balance doesn't reduce during that time, but the repayments are lower, which can improve cashflow and maximise the tax deduction available on the interest.

Principal and interest repayments include both interest and a portion of the loan balance, so the debt gradually decreases. The monthly cost is higher, but you build equity in the property and pay less interest over the life of the loan. Many property investors start with interest-only to keep costs down during the early years when cashflow is tightest, then switch to principal and interest once rents have increased or their income has grown.

Variable Rate or Fixed Rate?

You can choose a variable interest rate, which moves up or down with market conditions, or a fixed rate, which locks in a set rate for a defined period, usually one to five years. Some investors split their loan between variable and fixed to balance rate certainty with flexibility.

Variable rate loans generally allow unlimited extra repayments and full offset account access, which is useful if your rental income fluctuates or if you want to park surplus cash against the loan to reduce interest. Fixed rate loans offer predictable repayments but often come with restrictions on extra repayments and break costs if you refinance or sell before the fixed term ends.

Rental Income and Serviceability

Lenders use rental income to support your borrowing capacity, but they don't count every dollar. Most lenders apply a vacancy rate of around 20 per cent, meaning they assess serviceability using only 80 per cent of the expected rent. This buffer accounts for periods when the property may be vacant between tenants or undergoing repairs.

Rental yields in Beaumaris vary depending on property type and proximity to the beach. Units closer to Reserve Road and the foreshore tend to attract higher weekly rents than older homes further inland, but the purchase price is also higher, which affects the yield. When you apply for an investment loan, the lender will typically request a rental appraisal from a licensed property manager to verify the income figure you've provided. That appraisal becomes part of the loan assessment and determines how much rental income the lender is willing to include in your serviceability calculation.

Negative Gearing and Tax Deductions

Negative gearing occurs when the costs of owning an investment property, including loan interest, exceed the rental income. The loss can be deducted against your other income, such as salary, which reduces your taxable income and the amount of tax you pay.

Under legislation that received royal assent in June, properties purchased before 7:30pm AEST on 12 May 2026, and properties classified as eligible new builds purchased after that date, can continue to deduct losses against all income. For established properties purchased after that date, losses from the 2027-28 income year onward can only be offset against income from other residential properties, including capital gains. Excess losses can be carried forward to future years.

Other claimable expenses include property management fees, council rates, insurance, repairs and maintenance, body corporate fees, and depreciation on the building and fixtures. Interest on the loan remains deductible for all investment properties, regardless of when they were purchased, provided the property is rented or genuinely available for rent. You should speak with a tax adviser about how these rules apply to your specific situation.

Loan Amount and Borrowing Capacity

Your borrowing capacity for an investment loan depends on your income, existing debts, living expenses, and the rental income the property is expected to generate. Lenders also apply a serviceability buffer that tests your ability to repay the loan at a rate at least 3.0 percentage points above the actual product rate.

From February this year, lenders have been subject to a debt-to-income lending limit that caps the proportion of new loans they can write to borrowers with total debt six times or more than their gross annual income. The limit applies separately to investor and owner-occupier lending. While the cap sits at 20 per cent of each lender's quarterly investor loan book, in practice most lenders remain well below that threshold. If you're borrowing a large amount relative to your income, the lender may still approve the loan but apply a higher interest rate or require additional security.

Refinancing an Investment Loan

Refinancing involves moving your existing investment loan to a new lender, or restructuring it with your current lender, to access a lower rate, release equity, or adjust the loan features. Many investors refinance to consolidate debt, switch from interest-only to principal and interest, or access equity to fund a second investment property.

When you refinance, the new lender reassesses your income, expenses, and the property's current value. If property values have increased since you purchased, your loan-to-value ratio will have improved, which may allow you to negotiate a lower rate or access equity without paying LMI. If you're considering refinancing to fund further property purchases, you'll need to demonstrate that your income can service both the existing loan and any additional borrowing, with rental income included at the reduced rate discussed earlier.

Investment Loan Application Process

The application process starts with a conversation about your financial position, the property you intend to purchase, and your long-term goals. We'll gather details of your income, assets, liabilities, and current living expenses, then compare loan options from banks and lenders across Australia to find a product that suits your circumstances.

Once you've chosen a lender and loan structure, the formal application is submitted with supporting documents, including payslips, tax returns, bank statements, and a rental appraisal for the property. The lender will order a valuation to confirm the property's market value, assess serviceability, and issue conditional approval. After satisfying any conditions, such as providing a signed contract of sale or proof of savings for the deposit, the loan proceeds to settlement.

Settlement typically occurs four to six weeks after contracts are exchanged, though timelines vary. During that period, you'll arrange building insurance, organise final inspections, and appoint a property manager if you haven't already done so. Once the loan settles, ownership transfers to you, and rental income can begin as soon as a tenant is in place.

Call one of our team or book an appointment at a time that works for you. We'll walk through your options and help you access investment loan products suited to your goals and the Beaumaris property market.

Frequently Asked Questions