Looking for an Investment Property Loan? Here’s Everything You Need to Know

What is an Investment Property Loan?

An investment property loan is a specific home loan for people purchasing property as an investment rather than a primary residence. Investment loans have unique features that help you maximise your investment profits. They are generally more challenging to get approved than regular home loans because lenders look at your finances and the property’s earning potential before deciding whether to approve your loan.

How Is an Investment Loan Different from a Regular Home Loan?

The key difference between an investment property loan and an owner-occupied home loan lies in how lenders assess the risk and set the terms for each loan. Lenders see investment loans as higher risk compared to owner-occupied home loans. That’s because people tend to prioritise paying back their existing home loan rather than their investment loan if they run into financial trouble. Investment loans generally come with slightly higher interest rates, stricter lending criteria, and sometimes different loan structures.

Types of Investment Property Loans

The main types of investment loans to consider are:

Principal and Interest (P&I) Loans

Principal and interest loans are structured so that your regular repayments cover both the principal (the amount borrowed) and interest. With each payment, you gradually reduce your loan balance and interest repayments while paying the interest accrued at the same time.

These loans are outstanding if you’re focused on a long-term investment strategy and want to build equity in your investment property. While monthly repayments are higher compared to interest-only options, P&I loans offer a few advantages:

• You gradually reduce your loan balance over time

• You typically qualify for lower interest rates compared to an interest-only loan

• Your interest payments go down as your loan balance drops, and you pay less interest throughout the loan

• You build equity faster, which you can use to get a loan for another investment property.

Interest-Only Loans

As the name suggests, interest-only loans mean you only pay the interest portion of the loan. This arrangement lasts a specified period (typically 1-5 years). After the initial interest-only period, your loan reverts to a P&I loan.

Interest-only loans offer several potential benefits for property investors:

• You have lower initial repayments, improving your short-term cash flow

• You can use the extra cash flow to fund other investments

• You can maximise your tax deductions on interest payments.

However, these loans also come with potential risks:

• Interest rates are usually higher compared to P&I loans

• You won’t reduce your loan balance during the interest-only period

• You’ll have higher repayments when the loan reverts to principal and interest.

Equity Loans

Equity loans use the equity in your home or investment property as security for the loan. Most lenders will let you borrow up to 80% of your home’s current value minus what you still owe on the mortgage.

Equity loans offer several benefits:

• You can access funds to buy more investment properties without selling your current one

• You can use your equity as a deposit for additional properties, helping you grow your portfolio faster

• You can use the loan to renovate or improve existing properties to increase rent or market value.

Keep in mind that equity loans:

• Increase your overall debt levels

• Usually have higher interest rates than standard mortgages

• Require careful cash flow management

• Need your property to maintain or increase in value to be effective.

You’ll need to refinance if you decide to sell the property you have used as equity for an equity loan.

Choosing Your Investment Loan Interest Rate Structure

You can choose from fixed rates, variable rates, or a split loan combining both fixed-rate periods and other options.

Fixed Rate Loans

Fixed-rate home loans lock in your interest rate for a fixed period, typically 1-5 years. Then, the loan reverts to the lender’s standard variable rate (unless you refinance).

The key advantages of fixed-rate investment loans include:

• Predictable repayments for budgeting purposes

• Protection against interest rate increases during the fixed period

• Peace of mind during times of market volatility.

However, fixed loans also have limitations. If you refinance during the fixed period, you’ll miss out on interest rate drops and have to pay break costs.

Variable Rate Loans

Variable-rate loans have variable interest rates and rates that fluctuate according to market conditions. The advantages include:

• Potentially lower interest rates compared to fixed options

• Save money if the interest rate drops

• Flexible features like offset accounts and unlimited extra repayments.

However, if interest rates rise, your interest payments will increase.

Split Loans

Many investors opt for a hybrid approach, splitting their loan into fixed and variable portions. This can give you a balance between certainty and flexibility.

If you’d like further details on each loan structure, check out our full article: Fixed vs Variable Home Loan (or Split loan?) Find Which is Best for You.

How to Choose the Right Loan for You

When comparing loans, the two key points to consider are your interest rate and the loan features.

Interest Rates

Interest rates are the obvious starting point because interest will be your most significant cost throughout your loan. Even slight differences in interest rates make a big difference.

Pro Tip: Look at the comparison rate, not just the advertised interest rate. The comparison interest rate discount shows the loan’s actual cost by adding most fees and charges.

Loan Features

Loan features determine how flexible your loan is, how easily you can manage your cash flow, and what strategies you can use to maximise returns. The top three loan features to consider are:

1. Extra repayment options – Being able to make additional repayments means you can reduce your loan balance faster. Just be mindful that some lenders restrict extra repayments or charge fees.

2. Offset accounts – An offset account is a transaction linked to your loan. The balance of your offset account reduces the portion of the loan you pay interest on. This allows you to build up liquid funds for emergency use.

3. Redraw facilities – A redraw facility lets you access additional repayments you’ve made on your loan, giving you financial flexibility.

Visit our step-by-step guide to buying property for more detailed guidance on preparing for property purchases, including loan selection.

Costs of an Investment Property Loan

Nobody likes talking about fees and charges, but they’re a reality of investment property loans. Knowing the costs will save you from nasty surprises and find the best loan.

Upfront Costs

• Deposit – Generally, 10-20% of the property value for investment loans. A larger deposit may help you secure more favourable terms like a regular home loan.

• Lenders Mortgage Insurance (LMI) – If your deposit is less than 20% of the property value, you’ll need to pay Lenders Mortgage Insurance. LMI is insurance that protects the lender if you default on your loan. It can add thousands to your costs.

• Loan Establishment Fees – One-time fees to cover the cost of setting up your loan, including processing your application.

• Loan Application Fees – While these are often covered under loan establishment costs, some lenders charge a separate fee.

• Valuation Fees – Lenders use a professional to value the investment property before they approve your loan, to decide how much they’re willing to lend you.

Ongoing Costs

• Interest Payments are the largest ongoing cost for most property investors. Typically, investment loans have interest rates 0.2-0.5% higher than owner-occupied loans.

• Annual Package Fees – If your loan is part of a package with features like offset accounts or discounted rates, you may pay an annual fee.

• Account-Keeping Fees – Some lenders charge monthly account-keeping fees.

• Offset Account Fees – Check whether your lender charges a maintenance fee if you want an offset account.

• Ongoing LMI Premiums – If LMI is charged as an annual premium rather than a one-time upfront cost.

• Loan Top-Up Fees – An administration fee if you increase your loan.

Other Costs

• Break Costs – Charged if you end your fixed-rate loan early by refinancing or paying it off.

• Switching Fees – Expect to pay a switching fee if you change from variable to fixed with the same lender.

• Discharge Fees – When you pay off your loan or switch to another lender, you’ll pay a discharge fee to remove the mortgage from your property title.

• Redraw Fees – Charged when you access extra repayments you’ve made on your loan.

• Late Payment Fees—If you Miss a payment deadline, you’ll face a late fee, which can damage your credit score.

• Portability Fees—These are fees incurred in case you want to keep the same loan when you sell your investment property and buy another.

How to Qualify for an Investment Property Loan in Australia

Getting approved for an investment loan isn’t the same as a regular home loan. Banks see investment loans as riskier, so they have stricter lending criteria. Here’s what you need to know before you apply:

Key Eligibility Criteria

Income and Employment

Lenders want to see stable, consistent income before they approve your loan. Your salary, business income, and other earnings all count, but not all of your rental income will. Most banks only factor in 70-80% of your expected rent to account for vacancy periods or unexpected costs.

Credit Score

Your credit score can make or break investment loan approval. A score above 700 (considered ‘good’ by most lenders) is usually needed for better rates. If you have missed payments, defaults, or other credit issues on your record, you should resolve them before applying. If your credit rating is an issue, speak to a mortgage broker who understands bad credit applicants.

Deposit Requirements

Your deposit amount will impact your chance of approval and your loan terms. A higher Loan-To-Value Ratio (LVR) means you’re less likely to get approved:

• 20% deposit (80% LVR) – This is ideal. You won’t have to pay LMI, and since lenders will perceive you as a lower risk, you’ll have access to better rates.

• 10-15% Deposit (85-90% LVR) – Getting an investor loan is still possible, but you’ll need to pay LMI, which can add thousands to your upfront costs.

• 5-10% Deposit (90-95% LVR) – This is rare for investment loans. Some lenders allow it, but you’ll need strong financials and LMI.

Need help saving your deposit? Check out our guide to genuine savings.

Steps to Apply for an Investment Property Loan

Follow this 6-step checklist to apply for an investment property loan:

1. Assess Your Financial Position

Can you comfortably afford repayments if interest rates rise? Do you have enough savings for upfront costs (for example, stamp duty and conveyancing fees)? How strong is your credit score? Getting clear on these helps you make better loan amount and structure decisions.

2. Get Pre-Approval

Mortgage pre-approval (conditional approval) reveals how much you can borrow before purchasing properties. Getting pre-approval from a lender can help when negotiating with sellers and speed up the final application process. It also gives you an idea of how much you’ll be able to borrow.

3. Find a Suitable Property

The best property for you depends on your investment strategy – are you aiming for steady rental income, long-term capital growth, or a mix of both? Choosing the right location and property type is key, but there’s no one-size-fits-all approach. Explore the different property investments and find the best fit for your goals.

4. Submit a Formal Loan Application

Once you’ve found the right property, apply for your loan. Your lender will ask for documents like proof of income (payslips or tax returns), savings history, details of existing debts, and a copy of the signed contract of sale. If you’re using rental income to boost your borrowing power, you may need a rental appraisal from a real estate agent.

5. Property Valuation

Before approving your loan, the bank will arrange a property valuation to confirm its market value. This helps the lender determine how much they’re willing to lend and ensures the property meets their risk criteria. If the valuation is lower than expected, you might need to increase your deposit or adjust your loan amount.

6. Loan Approval and Settlement

Once the lender is happy with your application, they’ll issue formal loan approval. You’ll then sign the loan documents, and your lender will arrange a settlement, meaning they’ll transfer the funds to the seller, and the property will officially become yours.

Tax Implications of an Investment Property Loan

In Australia, property investment has significant tax advantages, some of which relate to the loan.

Interest Deductions

The biggest tax perk for property investment loans is claiming your interest on tax. While you can’t claim your whole repayment, you can claim the interest you pay. This will reduce your taxable income, which is one reason high-income earners often invest in property.

Negative Gearing

Negative gearing occurs when the costs of owning your investment property exceed the rental income it generates. This creates an investment’ loss’ that you can use to reduce your overall taxable income each year. Your loan is usually the most significant factor in creating a negatively geared position. The higher your loan amount, the more likely your property will be negatively geared. Some investors choose interest-only loans with higher interest rates to maximise their tax deductions.

For more information about claiming tax deductions on your investment loan, speak to local accountants in your area: