Do you know what investment loan features actually matter?

An investment loan is not just a home loan with a different label

An investment loan is designed for a property you intend to rent out. The loan structure, rate treatment, serviceability calculation and tax implications differ from an owner-occupier mortgage for teachers. Lenders assess your ability to service the debt using rental income, but they don't count all of it.

Consider an educator purchasing a rental property in their local area. They need to understand how much of the projected rental income the lender will include when calculating serviceability, and whether their existing salary alone will cover the debt if the property sits vacant for a few weeks. Most lenders apply a rental income shading factor of around 80 per cent, meaning they will only count $400 of a $500 weekly rent when assessing your borrowing capacity.

Interest-only repayments reduce holding costs during the rental phase

Interest-only repayments are common on investment loans because they lower the monthly outgoing and maximise the tax deduction. You're not reducing the loan balance during the interest-only period, but you're also not paying down principal with after-tax dollars while the property is negatively geared.

An interest-only period typically runs for one to five years, after which the loan reverts to principal and interest unless you request an extension. If you plan to hold the property long-term and build equity through capital growth rather than forced repayment, an interest-only structure can make sense during the accumulation phase. Once your income increases or your portfolio matures, switching to principal and interest becomes more viable.

Lenders assess interest-only loans more conservatively. Serviceability is tested at principal and interest rates even if you select interest-only, and some lenders apply higher rates or lower maximum loan-to-value ratios to interest-only applications.

Variable rates offer flexibility but fixed rates lock in certainty

Most investment loans are written on a variable rate because investors want the ability to make extra repayments, redraw funds or refinance without break costs. A variable rate moves with the market, so your repayments can rise or fall depending on rate changes.

Fixed rates suit investors who want certainty over their holding costs for a set period, particularly if cash flow is tight or if rates are expected to rise. The downside is reduced flexibility during the fixed term. You generally can't make extra repayments above a small annual threshold, and you can't access a redraw facility or offset account in most cases.

Some educators split their investment loan between fixed and variable portions to balance certainty and flexibility. This approach lets you lock in part of your repayment while retaining access to features like offset and redraw on the variable portion.

Offset accounts work differently on investment loans

An offset account linked to your investment loan reduces the interest charged without reducing your tax deduction. The loan balance remains unchanged, so the full amount of interest is still calculated on the original loan, but any funds in the offset reduce the amount of interest you actually pay.

This structure preserves your deduction while lowering your out-of-pocket cost. If you have surplus cash sitting in a transaction account earning minimal interest, placing it in an offset linked to your investment loan delivers a better effective return because you're reducing interest charged at the loan rate, not earning interest at a deposit rate.

Offset accounts are typically only available on variable rate investment loans. If you fix your rate, you'll usually lose access to offset functionality for the fixed period.

Borrowing capacity is calculated differently for investment loans

Lenders assess investment loan applications using your salary, any other income, existing debts and a portion of the expected rental income from the property. Rental income is shaded to account for vacancy periods, maintenance costs and interest rate buffers.

Your borrowing capacity is also affected by the serviceability buffer lenders must apply. As of the most recent regulatory settings, lenders assess your ability to repay the loan at a rate at least three percentage points above the actual loan rate. This buffer is applied regardless of whether you're borrowing as an owner-occupier or investor, but investors face the additional challenge of rental income shading.

If you're an educator looking to build a property portfolio, understanding your borrowing capacity now and how it will change as you add properties is critical. Each additional investment property affects your ability to borrow for the next one, even if the properties are positively geared on paper. We regularly see educators who could have accessed better loan structures or timed their purchases differently if they had mapped out their strategy from the start. Speaking with a mortgage broker for teachers before you begin can help you sequence your purchases and structure your loans to preserve future borrowing capacity.

Loan-to-value ratio and deposit requirements

Most lenders require a minimum 10 per cent genuine savings deposit for investment loans, though some will lend at higher loan-to-value ratios if you're prepared to pay Lenders Mortgage Insurance. LMI is a one-off premium that protects the lender if you default, and the cost increases sharply as your deposit decreases.

Some educators are eligible for LMI waivers for teachers on investment loans, depending on the lender and your employment status. These waivers can reduce upfront costs significantly, but they typically apply only to loans up to 90 per cent LVR and may come with conditions around loan features or interest rate pricing.

If you're using equity from your existing home to fund the deposit on an investment property, the combined loan-to-value ratio across both properties will determine whether LMI applies. Lenders assess the total debt against the total security value, not each property in isolation.

Tax deductions and cost base matter at sale time

Interest on your investment loan is deductible against your rental income, along with other holding costs such as property management fees, insurance, council rates and depreciation. The deduction applies only to the portion of the loan used to purchase or improve the investment property. If you redraw funds from the loan for private purposes, the interest on that portion is not deductible.

Keeping your investment loan separate from your owner-occupier debt makes it easier to track deductible interest and manage your tax position. Mixing the two can create complications at tax time and may reduce the amount you can claim.

When you sell the property, capital gains tax applies to any profit above your cost base. Your cost base includes the purchase price, stamp duty, legal fees and certain improvement costs, but not repairs or maintenance. From 1 July 2027, the method used to calculate capital gains tax on investment properties will change for gains accruing after that date, and properties purchased after 12 May 2026 are subject to different negative gearing rules. These changes won't affect properties you already own or are under contract to purchase before that date, but they will affect how new acquisitions are taxed in future years.

Rate discounts depend on loan size and your relationship with the lender

Rate discounts on investment loans are generally smaller than those available on home loans for teachers. Lenders view investment lending as higher risk, and the pricing reflects that. However, educators with strong serviceability, stable employment and a low loan-to-value ratio can still negotiate reasonable discounts, particularly if they're consolidating multiple loans with one lender or borrowing a larger amount.

Rate discounts are not advertised. They're negotiated based on your profile, the loan size and the lender's appetite for investment lending at the time you apply. A broker can approach multiple lenders on your behalf and compare the rates and features available without you needing to submit multiple applications.

Refinancing your investment loan when your circumstances change

Your investment loan should be reviewed every few years to confirm the rate, features and structure still suit your circumstances. If your income has increased, your loan balance has reduced or your property has increased in value, you may be able to refinance to access a lower rate, switch from interest-only to principal and interest, or release equity to fund another purchase.

Refinancing an investment loan is treated as a new application, so you'll need to provide updated income evidence, rental statements and property valuations. Lenders will reassess your serviceability using current rates and buffers, so even if your circumstances haven't changed, your borrowing capacity may differ from when you first borrowed.

If you're considering refinancing to release equity for another investment property, the timing matters. Lenders will want to see at least six months of rental history on the existing property before they'll include that income in their serviceability assessment. Refinancing too early can limit your options or force you to rely solely on your salary to service both loans.

Call one of our team or book an appointment at a time that works for you. We'll review your current loan structure, confirm your borrowing capacity for future purchases and help you access investment loan options from lenders across Australia.

Frequently Asked Questions