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
General information only, current as at 15 January 2025. It does not take your objectives, financial situation or needs into account. Grants, schemes, rates and lender policies change; check the figures that matter to you before you act, or speak with us. J2C Mortgage Advisory is Credit Representative 577408 of Australian Finance Group Ltd, Australian Credit Licence 389087.
