Investment Property Loans: What Is Different

Key takeaways

• Expect a rate premium of roughly 0.2-0.5 points over owner-occupier pricing.
• Rental income is shaded to 70-80%, so it adds less capacity than it appears to.
• Interest-only is more common and more available on investment lending.
• Interest is deductible; keeping the loan structurally clean protects that.

Why the pricing differs

Regulators require banks to hold more capital against investor lending than owner-occupier lending, and investment loans have historically shown higher loss rates in downturns. That capital cost is passed through in the rate.

On a $600,000 loan over 30 years, a 0.35 point premium is about $135 a month, or roughly $48,000 over the full term.

How rental income is assessed

A property renting at $600 a week - $31,200 a year - is not assessed at $31,200. Lenders shade it to allow for vacancy, management and maintenance:

That difference between an 80% and a 70% lender is over $3,000 of assessed income, which flows straight through to borrowing capacity.

Structuring to protect deductibility

Interest on money borrowed to produce income is deductible; the purpose of the borrowing determines this, not the security.

• Keep loans separate. Never mix an investment loan with private borrowing in one account - untangling it later is painful and sometimes impossible.
• Prefer offset over redraw. Redrawing from an investment loan for private purposes creates a non-deductible portion.
• Do not pay down an investment loan ahead of a non-deductible home loan, in most cases. Directing spare cash at the non-deductible debt first is usually the better order.

This is general information - confirm your structure with a registered tax agent before settlement, not after.

Frequently asked questions

Should I take interest-only on an investment loan?

It maximises deductible interest and preserves cash flow, which is why investors use it - but the balance does not reduce, and the repayment jumps when it reverts to principal and interest over a shorter remaining term.

Can I use equity in my home as the deposit?

Yes, and it is common. Borrowing against your home to fund an investment deposit keeps the interest on that portion deductible, provided the purpose is documented and the loans are kept separate.

Do investment loans have lower maximum LVRs?

Often slightly. Many lenders cap investment lending at 90% including LMI, and some at 80%, where owner-occupier lending may extend to 95%.

Related reading

• Rentvesting: Buying Where You Can Afford, Living Where You Want
• Reverse Mortgages and the Home Equity Access Scheme
• Bridging Finance: Buying Before You Sell

Sources

• Prudential Practice Guide APG 223 — APRA
• Rental properties - interest deductibility — Australian Taxation Office