Investment Property Loan —
How It Works

How investment loans differ from home loans

When you borrow to purchase an investment property, lenders treat the application differently than a standard owner-occupier loan. The key differences are in pricing, deposit requirements, and how they assess your ability to service the loan.

Investment loan interest rates are typically higher than owner-occupier rates. This premium reflects the additional risk lenders associate with investment lending — historically, borrowers under financial pressure are more likely to default on an investment property than their home. The rate difference is usually 0.2 to 0.5 percentage points, but this varies by lender and can be negotiated.

Most lenders require a minimum deposit of 10 per cent for investment properties, though 20 per cent is strongly preferred. With less than 20 per cent, you will need to pay Lenders Mortgage Insurance, and not all lenders offer LMI on investment loans. Some limit the maximum LVR for investors to 80 per cent.

How lenders assess rental income

When calculating your borrowing capacity, lenders include expected rental income — but not at its full value. Most lenders apply a shading of 70 to 80 per cent, meaning they only count 70 to 80 cents of every dollar in expected rent. This accounts for vacancy periods, property management fees, and maintenance costs.

The rental estimate can come from a property manager's appraisal, comparable rental data, or the existing tenancy agreement. Different lenders use different shading percentages, which means your borrowing power for the same property can vary significantly depending on which lender you apply with. This is one of the main reasons working with a broker for investment lending adds real value.

Loan structure options for investors

Investment loans offer several structural choices that affect your tax position and cash flow. Interest-only repayments reduce your monthly outlay and maximise the amount of tax-deductible interest you pay, which is why they are popular with investors. Principal and interest repayments build equity faster but cost more each month. The right choice depends on your investment strategy, cash flow position, and tax situation.

It is also important to consider whether to use a standalone loan or leverage equity from your existing property. Each approach has different implications for risk, flexibility, and borrowing capacity. Read our guide on using equity to buy an investment property for a detailed comparison.

Frequently asked questions