What are Investment Loans and How Do They Work?

What is an Investment Loan?

An investment loan is finance secured against a property you intend to rent out rather than live in. Lenders assess these applications differently to owner-occupier borrowing because rental income replaces salary as the primary repayment source, and they factor in vacancy periods and the higher risk that comes with investment lending.

The loan structure can look identical to a home loan, variable or fixed rate, principal and interest or interest only, but the interest rate will typically sit 0.2 to 0.5 percentage points higher. That gap reflects the additional risk weight lenders carry under prudential regulations, which flow through to pricing. You'll also be assessed on your ability to service the loan at a rate at least 3.0 percentage points above the actual loan rate, and lenders will shade rental income by around 20 per cent to account for periods when the property sits empty.

Morningside sits within 6 kilometres of the CBD, close to Oxford Street cafes and Lytton Road access, and attracts a mix of young professionals and families who rent Queenslanders and newer townhouses. Vacancy rates in the area have stayed low in recent years, which works in your favour when a lender reviews serviceability. If you're buying an investment property around Morningside, the rental income you can demonstrate will directly influence how much you can borrow and whether the loan application clears serviceability.

How Much Deposit Do You Need?

Most lenders require a 20 per cent deposit to avoid Lenders Mortgage Insurance on an investment property loan. If you have less than that, you can still borrow, but you'll pay an LMI premium that increases as your deposit shrinks. That premium is a one-off cost, usually capitalised into the loan amount, and it's calculated on a sliding scale based on the loan size and loan-to-value ratio.

Consider a buyer who already owns a home in Balmoral and wants to purchase a two-bedroom unit in Morningside as a rental. If they can access 20 per cent equity from their existing property, they can fund the deposit without needing to save further cash. That approach is common among second-time investors who have built equity in their owner-occupied home and want to leverage it without selling. The lender will assess the total debt across both properties and apply the serviceability buffer to the combined borrowing. Rental income from the new Morningside unit helps offset the loan commitment, but only after the lender shades it by around 20 per cent.

If you're borrowing above 80 per cent LVR, the lender will also apply a higher risk weight under APS 112, which may further affect pricing or the rate discount you're offered. Some lenders cap investment lending at 90 or 95 per cent LVR depending on their appetite at the time, so it's worth checking what's available before you commit to a property.

Variable or Fixed Rate for an Investment Property?

You can lock in a fixed rate for one to five years, or stay on a variable rate that moves with the market. Variable rates give you flexibility to make extra repayments without penalty and to redraw funds if the loan allows it. Fixed rates give you certainty over repayments for the fixed period, but you're usually restricted on additional payments and you'll face break costs if you refinance or sell before the term ends.

In our experience, investors who plan to hold the property long-term and want predictable cash flow often split the loan, fixing a portion and leaving the rest variable. That way you get some rate protection without losing all flexibility. If you're buying in Morningside and expect the property to increase in value over the next few years, keeping a variable portion means you can access equity later without breaking a fixed contract.

Interest Only or Principal and Interest?

Interest-only repayments are lower each month because you're not paying down the loan balance, which can help with cash flow if you're negatively geared. The loan amount stays the same for the interest-only period, usually one to five years, and then reverts to principal and interest unless you apply to extend it. Lenders assess interest-only applications more carefully, and under APS 112, an interest-only loan with an LVR above 80 per cent and a term longer than five years or unspecified is classified as non-standard, attracting a higher risk weight.

If you're buying an established property in Morningside after 12 May 2026, you need to understand how the negative gearing changes affect your decision. Losses on that property can only be offset against other residential property income from the 2027-28 income year onward. That means if your rental income doesn't cover the interest and other holding costs, you can't deduct the shortfall against your salary anymore. You can carry the loss forward and use it against future property income or capital gains, but the immediate tax benefit disappears.

Properties held or under contract at 7:30pm AEST on 12 May 2026 are grandfathered, so losses remain fully deductible. New builds acquired after that date are also exempt and can still be negatively geared in the traditional sense. If you're deciding between an established unit and a newly constructed townhouse in Morningside, the tax treatment alone might shift the numbers enough to change which property makes sense.

What Happens to Your Borrowing Capacity?

From 1 February 2026, lenders face a restriction that no more than 20 per cent of their new investment lending can go to borrowers with a debt-to-income ratio of six times or higher. If your total borrowing, including your owner-occupied home loan and the new investment loan, exceeds six times your household income, you may find fewer lenders willing to approve the full amount you're after.

This limit applies separately to investment loans and owner-occupier lending, and it's measured at the lender level each quarter. Non-bank lenders are not currently subject to the DTI restriction, which means they may still lend to you if the banks decline. Your borrowing capacity will also depend on existing commitments, credit card limits, childcare costs, and how the lender treats rental income. Some lenders will accept 80 per cent of the projected rent, others apply a more conservative figure, and that difference can shift your maximum loan amount by tens of thousands of dollars.

What About Tax Deductions and Holding Costs?

Interest on an investment property loan is deductible to the extent the property is rented or genuinely available for rent. So are council rates, insurance, body corporate fees if the property is in a complex, property management fees, repairs, and depreciation on the building and fixtures. You claim these deductions in your annual tax return, and they reduce your taxable income.

If you're negatively geared, which means your deductible expenses exceed your rental income, you'll make a loss on paper. Under the current rules, that loss reduces your overall taxable income and may increase your tax refund. From the 2027-28 income year, if you bought an established property in Morningside after 12 May 2026, that loss can only offset income or gains from other residential properties. The loss doesn't disappear, it carries forward, but you won't see the tax relief until you have residential property income to offset it against.

Stamp duty on the property purchase is not deductible. Neither are borrowing costs like establishment fees if they relate to the first five years of the loan, although you can claim them over that period at 20 per cent per year. Ongoing annual fees are immediately deductible.

What Changes When You Sell?

Capital gains on investment property are taxed when you sell. If you've held the property for more than 12 months, you currently get a 50 per cent discount on the gain, meaning only half of the gain is added to your taxable income. That discount applies to gains accruing up until 1 July 2027.

From 1 July 2027, the rules change. You'll index the cost base of your property in line with inflation and pay tax on real gains only, with a minimum 30 per cent rate applying to the indexed gain. For properties owned before 1 July 2027 and sold after that date, the gain is split, the portion accruing before 1 July 2027 is taxed under the old 50 per cent discount, and the portion after that date is taxed under the new indexed rules. You can either obtain a market valuation at 1 July 2027 or use an ATO apportionment formula.

If you bought an eligible new build, you get to choose between the 50 per cent discount and the indexed method at the time you sell, which gives you flexibility depending on inflation and your tax position at that time. Carried-forward losses from the property can also be offset against the capital gain, which can reduce the tax bill when you exit.

Should You Refinance an Existing Investment Loan?

If you already own an investment property and your loan is on a higher rate or no longer suits your situation, refinancing can reduce your repayments or release equity for further investment. Rate discounts have widened over the past few years, and moving to a lender with a lower rate or more flexible features can make a material difference to your cash flow.

You can also refinance to access equity that's built up in the property without selling it. That equity can fund a deposit on another investment property, and the interest on the additional borrowing is deductible if the funds are used to acquire an income-producing asset. If you're sitting on equity in a Morningside property you've held for several years, a loan health check will show you what's available and whether refinancing makes sense given your current goals.

Call one of our team or book an appointment at a time that works for you. We'll walk through your situation, run the numbers across lenders, and set up the loan structure that fits what you're building.

Frequently Asked Questions