An investment property loan finances a property you plan to hold as an investment rather than live in. It works much like an owner-occupier loan, but lenders assess it differently, and how you structure it affects more than this one purchase: your cash flow, your flexibility and your ability to borrow again.
Here’s how it works, what lenders look at and what to consider before you apply.
What is an investment property loan?
An investment property loan is finance used to buy a property you intend to rent out or otherwise hold as an investment. The property you buy is commonly used as security for the loan.
Depending on the lender and product, it may have a fixed or variable rate, with principal-and-interest or interest-only repayments. Because the borrowing is for investment rather than owner-occupation, lenders may assess and price it differently.
You remain responsible for the repayments regardless of how much rent the property earns, whether it’s vacant for a time or how its value changes.
How do lenders assess an investment property loan?
Lenders use many of the same fundamentals as for an owner-occupier loan, plus the income, costs and risks that come with holding a property as an investment. They look at whether you can afford the proposed loan alongside your existing commitments:
- Your income: salary and other eligible income.
- Living expenses and debts: living expenses, existing home and investment loans, credit cards and other commitments.
- The property: a lender may arrange a valuation and use it to calculate the loan-to-value ratio (LVR), which can influence available products, pricing and whether lenders mortgage insurance (LMI) applies.
- Repayment structure: principal and interest or interest-only can also affect the assessment.
- Rental income: covered below.
Lenders apply their own serviceability and credit policies, so the same income, rent, debts and property value can produce different outcomes with different lenders. An investment application is assessed as part of your whole financial position, not simply on whether the expected rent covers the mortgage.
How does rental income affect borrowing capacity?
Rental income can contribute to your borrowing capacity, but lenders generally don’t count every dollar. They may reduce the amount to allow for vacancy, management costs and uncertainty around future rent, and how they do this varies between lenders and properties.
For illustration: if a property rents for $500 a week ($26,000 a year) and a lender counts 80% of it, the rent used in the assessment is $20,800. Lenders set their own percentages.
If you already own investment property, the lender may consider both the rental income and the debt on those properties, alongside your other income and commitments. Rental income is only one part of serviceability, and the application still has to meet the lender’s credit and affordability criteria.
How much deposit do you need for an investment property?
There’s no single deposit amount. It depends on the lender, the property, your financial position and the LVR the lender will accept.
A 20% deposit is a common benchmark because it may reduce or avoid LMI in many situations, but it isn’t a universal requirement. Some lenders may consider a smaller deposit, while others may require more depending on the property or application.
Your deposit is separate from purchase costs such as transfer duty, conveyancing and inspections. And having enough cash or equity for the deposit doesn’t, on its own, mean the purchase is possible: your borrowing capacity and the lender’s credit criteria still need to support the overall loan.
Can you use equity to buy an investment property?
Yes, in many cases. If you already own a property, some of the equity in it may be available to help fund the deposit and purchase costs.
Equity is the difference between the property’s value and what you owe against it, but not all of it is available to borrow. How much is accessible depends on the lender’s valuation, maximum LVR, your existing loan balance, borrowing capacity and credit policy.
How the equity is accessed also matters. Increasing an existing loan, creating a separate loan split or using another security structure each has different practical implications. Using your home as additional security, for example, can link the properties, so understand the setup and the risks before you proceed.
Which repayment type suits an investment loan?
Investors may be able to choose between principal-and-interest and interest-only repayments, depending on the lender, product and application.
| Principal and interest | Interest-only | |
|---|---|---|
| Scheduled repayment | Covers the interest and part of the loan balance. | Generally covers only the interest for an agreed period. |
| Loan balance | Reduces from the first repayment. | Usually doesn’t reduce during the interest-only period unless you make extra repayments. |
| Cash flow | Higher required repayments initially. | Lower required repayments during the interest-only period. |
| Total interest | Lower over the life of the loan, all else being equal. | Can be higher, because the balance isn’t being reduced through scheduled repayments. |
| When the period ends | No change in repayment type. | The loan generally converts to principal and interest over the remaining term, which can mean a higher required repayment. |
For illustration, take a $500,000 loan at 6.5% p.a. over 30 years. Interest-only repayments are about $2,708 a month. Principal-and-interest repayments are about $3,160 a month. If the interest-only period is five years and the loan then converts to principal and interest over the remaining 25 years, the repayment rises to about $3,376 a month.
Interest-only can lower the required repayment and help short-term cash flow, but that doesn’t automatically make it the better structure. It shouldn’t be treated as an investor default or a tax strategy. The right choice depends on your cash flow, objectives, lender policy and broader borrowing position, and any tax implications should be confirmed with a registered tax adviser.
What costs should you allow for when buying an investment property?
The cost of an investment property goes beyond the deposit and loan repayments. You need to allow for both the upfront costs of buying and the ongoing costs of holding the property.
- Upfront: transfer duty, conveyancing or legal fees, building and pest inspections, loan or valuation fees where applicable, and LMI if required.
- Ongoing: council and water rates, insurance, strata or body corporate fees, property management, maintenance and repairs.
- Vacancy: periods when the property is empty and no rent is coming in.
These costs affect both the cash you need to complete the purchase and the property’s ongoing cash flow, and some may form part of the lender’s assessment.
Tax treatment varies by expense and circumstance. Confirm deductions, depreciation and other tax outcomes with your accountant or registered tax adviser.
Why does loan structure matter, and how does it affect your next property?
Your first investment loan becomes part of the financial position a lender assesses when you apply for another property, so how it’s set up can affect more than this purchase. Structure includes:
- principal and interest versus interest-only
- whether separate loan splits are used
- how any equity release is set up
- whether private and investment borrowing are kept distinct
Mixing personal and investment debt within the same loan or redraw facility can create practical and record-keeping complications, including for tax. Confirm the consequences with your accountant.
For your next application, a lender will look at your existing loan balance, required repayments and other debts. Rental income from the first property may be considered, though lenders may accept only part of it. Repayment structure matters too: principal and interest reduces the balance over time, while an interest-only loan may leave the principal unchanged during the interest-only period. Equity may become relevant later, but don’t assume the property will rise in value or that all of the equity will be accessible.
That’s why the lowest rate isn’t the only consideration. A loan that looks attractive for this purchase may be less suitable if it reduces your flexibility or makes the next stage harder to manage.
Investment property loan FAQs
How much can I borrow for an investment property?
There’s no single amount. A lender will assess your income, accepted rental income, living expenses, existing debts, the proposed loan, the property value and its own serviceability rules, so borrowing capacity can vary from one lender to another.
Are investment property loan rates higher?
They can be, but not always. Lenders may price investment loans differently, and rates also vary by LVR, repayment type, product and borrower profile. Compare the overall loan structure and cost rather than assuming every investor loan carries the same premium.
Is it harder to get an investment loan than an owner-occupier loan?
Not necessarily harder, but assessed differently. Lenders consider rental income, existing investment debts and property costs alongside your income and expenses, and policies vary between lenders. Approval depends on your whole financial position.
Can an investment property loan be interest-only?
Yes, with some lenders, subject to their credit criteria and product settings. The principal generally doesn’t reduce during the interest-only period, and repayments may rise when the loan converts to principal and interest.
Can I refinance an investment property loan?
Yes, subject to lender approval. Refinancing may let you change the rate, features, repayment structure or lender, but switching costs and the remaining term matter. The test is whether it improves your overall position after those costs.
Can I use my home as security for an investment property?
Some lenders may allow it, but it isn’t the only way to structure a purchase. Using more than one property as security for linked lending is often called cross-collateralisation. It can link the properties, so understand the security setup, available equity and risks before you proceed.
Do lenders count all of the rent from an investment property?
Usually not. Lenders commonly allow for vacancy and uncertainty and may factor in property expenses. The amount accepted varies between lenders.
Do I need a 20% deposit for an investment property?
Not necessarily. A 20% deposit is a common benchmark, but lender requirements vary. Some applications may be considered with a smaller deposit, while others may need a larger contribution.
Can I have more than one investment property loan?
Yes. There’s no simple rule limiting an investor to one loan, but each additional property and debt becomes part of the next lender assessment, alongside your borrowing capacity, rental income treatment, existing repayments, equity and lender policy.
Your investment plan
Treat an investment property loan as part of your broader borrowing position, not just a way to fund one purchase. The most suitable structure isn’t always the one with the lowest rate or the smallest initial repayment.
At The Finance Architect, we structure the lending around both the property you’re buying now and what you may want to do next.
Thinking about an investment property? Book a Discovery Call with Dale to work through your borrowing position and loan options.
