Financing an investment property is different from buying your home. This guide covers what you need to know about investment loans, structuring, and building a portfolio.
Key Differences from Owner-Occupied Loans
- Higher interest rates: Typically 0.2-0.5% higher than owner-occupied
- Larger deposits: Most lenders require minimum 10%, prefer 20%
- Rental income counted: Usually at 80% (to allow for vacancies)
- Interest-only available: Up to 5 years for cash flow management
How Much Deposit Do You Need?
- 10% deposit: Possible but you'll pay LMI and have limited lender options
- 20% deposit: Recommended to avoid LMI and access better rates
- Using equity: You may be able to use equity from your home instead of cash
Principal & Interest vs Interest-Only
Interest-Only (IO)
- Lower repayments during the IO period
- Maximizes cash flow
- You're not paying down the loan
- Typically available for up to 5 years
Principal & Interest (P&I)
- Higher repayments but builds equity
- Lower total interest over loan life
- Better rates than IO
Strategic Tip
Many investors use IO on investment loans while paying P&I on their home loan. This maximizes tax-deductible debt while paying down non-deductible debt faster.
Loan Structuring
How you structure your loans matters for flexibility and tax efficiency:
Avoid Cross-Collateralization
Cross-collateralization is when multiple properties secure one loan. It can limit your flexibility and complicate selling or refinancing. We typically recommend separate loans for each property.
Use Offset on Owner-Occupied, Redraw on Investment
Offset accounts on your home loan reduce non-deductible interest. For investment properties, a redraw facility achieves similar benefits without the ATO complications.
Using Equity to Invest
If your home has increased in value, you can release equity to fund your investment deposit:
- Get your property valued
- Calculate usable equity (typically up to 80% of value minus current loan)
- Set up an equity release or line of credit
- Use funds for investment deposit and costs
Tax Considerations
Note: We're not tax advisers. Consult your accountant for specific advice.
- Interest deductions: Interest on investment loans is tax-deductible
- Negative gearing: When expenses exceed income, reducing taxable income
- Depreciation: Building and fixtures can be depreciated
- Capital gains: 50% discount after 12 months
Next Steps
- Use our borrowing calculator to check your capacity
- Book a strategy session to discuss structuring
