Common Mistakes When Buying an Investment Property

Established Properties and Investor Loan Structures

An investment loan for an established property works differently from an owner-occupier mortgage. Lenders price these loans higher because the risk profile is different. You're borrowing to generate rental income, not to live in the property yourself, and that changes how banks assess your application and what rate you'll pay.

Most lenders will lend up to 90 per cent of the property value for an investment purchase, though you'll pay Lenders Mortgage Insurance above 80 per cent LVR. The deposit requirement is typically 10 per cent at a minimum, plus stamp duty and settlement costs. If you're using equity from another property instead of cash savings, the same LVR limits apply across your total borrowing.

Consider a buyer refinancing their owner-occupied home to release equity for an investment purchase. They have $120,000 in available equity and want to buy an established unit. Their borrowing capacity gets assessed on the new total debt across both properties, not just the investment loan in isolation. The rental income from the new property gets included in serviceability, but lenders typically shade it by 20 per cent to account for vacancy and management costs. If the projected rent is $500 per week, the lender treats it as $400 for serviceability purposes. The buyer's existing home loan repayments, the new investment loan repayments, and all other commitments get tested at an interest rate at least 3 percentage points above the actual loan rate. In this scenario, the buyer could borrow around $450,000 for the investment property based on their income and existing commitments, but the equity available limited the purchase to properties up to $480,000 after allowing for costs.

Interest Only or Principal and Interest Repayments

Interest only repayments keep your monthly outgoings lower and maximise your tax deductions because you're not paying down non-deductible principal. Most lenders offer interest only periods of up to five years on investment loans, after which the loan reverts to principal and interest unless you apply to extend it.

The trade-off is that you're not building equity through repayments, only through any capital growth in the property value. If the market stays flat or falls, your equity position doesn't improve. You'll also pay a higher interest rate on an interest only loan compared to principal and interest, typically between 0.20 and 0.40 percentage points depending on the lender.

For many investors, the cash flow benefit outweighs the rate difference, particularly in the early years when rental income might not fully cover the loan repayments and other holding costs. The investment loans structure you choose should match your broader property investment strategy, whether that's building a portfolio quickly or paying down debt over time.

Variable or Fixed Interest Rates for Investment Properties

Variable rates give you flexibility to make extra repayments or pay out the loan without break costs. Fixed rates lock in your repayments for a set period, usually between one and five years. At current variable rates, most investors are paying somewhere between 5.5 and 7 per cent depending on their LVR, loan size and whether the loan is interest only or principal and interest. Fixed rates are priced similarly but remove the risk of rate rises during the fixed period.

You can split your loan between fixed and variable, which gives you some rate certainty while keeping a portion flexible for extra repayments or offset account use. Offset accounts typically aren't available on the fixed portion of a split loan, so factor that into your decision if you're planning to park surplus cash against the loan balance.

One thing to watch is that fixed rate investment loans generally sit 0.10 to 0.30 percentage points higher than fixed rate owner-occupier loans at the same LVR and loan size. The pricing difference reflects the higher risk weight that lenders apply to investment lending under the prudential standards.

Borrowing Capacity and the Debt to Income Limit

How much you can borrow for an investment property depends on your income, existing debts, living expenses, and the rental income from the property. From February this year, lenders have been restricted in how much they can lend to borrowers with high debt to income ratios. Each bank can only write up to 20 per cent of their new investor loans to borrowers whose total debt is six times their gross income or more.

If you're earning $100,000 a year and you already have $400,000 in debt across your home loan and investment loans, adding another $200,000 investment loan puts you at a debt to income ratio of six. You're still within the limit, but only just. If you wanted to borrow $300,000 instead, you'd have a ratio of seven, and the lender would need to count that loan within their 20 per cent quota. That doesn't mean you can't get the loan, but it does mean the lender will scrutinise your application more closely and some lenders may decline it outright if they've already reached their quota for the quarter.

Your borrowing capacity also gets tested at a rate at least 3 percentage points above the actual loan rate, so even if you're borrowing at 6 per cent, the lender is assessing whether you can service the loan at 9 per cent. That buffer significantly reduces how much you can borrow compared to what the repayments at the actual rate would suggest.

Negative Gearing and the Changes from the 2027-28 Tax Year

Negative gearing means your rental income is less than your loan interest and other holding costs, creating a loss that you can deduct against your other income like salary. For established investment properties purchased before 12 May this year, you can continue to claim the full loss against all your income indefinitely. For established properties purchased after that date, the rules change from the 2027-28 tax year onwards.

From 1 July next year, losses on those newer established properties can only be offset against income from other residential properties, including capital gains. You can't offset them against your salary anymore. The losses don't disappear, they carry forward and can be used against future residential property income, but the immediate tax benefit is gone unless you own multiple properties with positive cash flow elsewhere.

New builds are exempt from the change. If you buy a property that's been newly constructed on vacant land, or where the construction increased the number of dwellings on the site, you can still negatively gear it against all your income regardless of when you bought it. A knock-down rebuild that replaces one house with one house doesn't count as a new build for this purpose.

The capital gains tax treatment is also changing from 1 July next year. The 50 per cent CGT discount is being replaced with cost base indexation and a 30 per cent minimum tax rate on real gains. For properties you already own, gains up to 1 July next year are taxed under the current rules and gains after that date are taxed under the new rules. The detail matters, so speak to a tax adviser before you commit to a purchase if you're buying an established property as an investment.

Loan Features That Actually Matter for Investors

Offset accounts, redraw facilities and the ability to make extra repayments without penalty are useful features, but they're not all available on every investment loan product. Offset accounts are typically only available on variable rate loans or the variable portion of a split loan. They let you park cash against your loan balance and reduce the interest charged without actually paying down the principal, which keeps your deductible debt as high as possible.

Redraw facilities let you pull out any extra repayments you've made, but some lenders charge a fee for each redraw and some have minimum redraw amounts. If you're planning to access the funds regularly, an offset account is more practical.

Portability is another feature worth checking. If you sell the investment property and buy another one, some lenders let you port the loan across to the new property without breaking the existing loan or paying discharge fees. Others treat it as a new loan and you'll pay for a new valuation, application and settlement.

Some lenders also let you capitalise the LMI premium into the loan amount rather than paying it upfront. That increases your loan balance and your ongoing interest cost, but it reduces the cash you need at settlement. The decision depends on your cash flow position at the time of purchase.

Refinancing an Investment Loan After Purchase

You're not locked into your investment loan for the life of the loan. If your property has increased in value or your income has improved, refinancing might get you a lower rate, access to equity for another purchase, or a loan structure that suits your current circumstances.

Lenders reassess your serviceability when you refinance, so the same debt to income limits and interest rate buffers apply. If you've added more debt since you took out the original loan, your borrowing capacity might have reduced even if your income has stayed the same. Refinancing costs typically include a valuation fee, application fee, settlement fee and sometimes discharge fees from your existing lender, so the rate saving or equity release needs to justify those costs.

If you're refinancing to access equity, lenders will typically let you borrow up to 80 per cent of the current property value without LMI, or up to 90 per cent with LMI. The equity you can access is the difference between your current loan balance and the maximum LVR the lender will approve. A property worth $600,000 with a loan balance of $400,000 gives you up to $80,000 in usable equity at 80 per cent LVR, less the costs of refinancing.

Call one of our team or book an appointment at a time that works for you. We'll step through your current position, what you're trying to achieve with the investment purchase, and which lenders and loan structures give you the most useful combination of rate, features and flexibility for your situation.

Frequently Asked Questions