When to Use Interest-Only vs Principal and Interest

An investment loan is a mortgage secured against a property you buy to rent out and generate income. The structure you choose affects your cash flow, tax deductions and long-term wealth position, so understanding which features suit your situation is worth getting right.

Interest-Only Repayments and When They Work

Interest-only means you pay only the interest charge each month and the loan balance stays the same. The upfront benefit is lower monthly repayments, which can improve cash flow and increase tax-deductible interest.

Consider an investor who buys a two-bedroom unit in Cannon Hill with a variable rate investment loan of $550,000 at current rates. On interest-only, the monthly payment might sit around $2,750. Switch that same loan to principal and interest and the repayment jumps to roughly $3,400 a month. That extra $650 each month is equity being built in the property, but it's not tax-deductible because you're paying down debt rather than servicing it.

Interest-only periods typically run for one to five years, and you can usually renew them if your circumstances and lender policy allow. After the interest-only period ends, the loan reverts to principal and interest unless you arrange an extension. Lenders assess borrowing capacity based on principal and interest repayments even if you apply for interest-only, so you need to show you can afford the higher amount from day one.

If your priority is freeing up cash to invest elsewhere, manage multiple properties or fund a renovation that adds value, interest-only can be a useful tool. If you want to reduce debt and own the property outright sooner, principal and interest is the direct path.

Variable Rates and Offset Accounts

A variable rate investment loan moves with the lender's standard rate, which usually tracks the Reserve Bank cash rate. Repayments go up or down when the rate changes.

Variable loans often come with an offset account, which is a transaction account linked to your loan. Every dollar in the offset reduces the balance on which interest is calculated. If you have $20,000 in offset and a $500,000 loan, you pay interest on $480,000. The interest saved is not taxable income, and the full loan balance remains deductible because you're not paying down the principal.

For investors, an offset account lets you park income or savings and reduce interest costs without losing the tax deduction on the full loan amount. That makes it more tax-effective than putting the same money into a redraw facility or paying extra off the principal, which can complicate your deductions if you later redraw for private purposes.

Variable loans also tend to allow extra repayments and redraw without penalty, though you need to manage redraw carefully to keep your deductible and non-deductible debt separate.

Fixed Rates and Rate Certainty

A fixed rate locks in your interest rate for a set period, typically one to five years. Your repayment stays the same regardless of what happens to variable rates during that time.

Fixed rates suit investors who want predictable repayments or expect rates to rise. The trade-off is less flexibility. Most fixed loans don't offer offset accounts, limit extra repayments to a small annual amount, and charge break costs if you refinance or pay out the loan early.

Break costs can be substantial if rates have fallen since you fixed. They're calculated based on the lender's funding cost difference over the remaining fixed term. Some investors split their loan, fixing part for certainty and keeping part variable for flexibility and offset access. You can read more about refinancing options if your fixed term is ending and you want to reassess your structure.

Interest Rate Discounts and How to Access Them

Lenders publish a standard variable rate for investment loans, but most borrowers don't pay it. The rate you actually get depends on your loan size, deposit, property type, income strength and the lender's appetite at the time.

Investor rates are typically higher than owner-occupier rates because lenders treat investment lending as higher risk under APRA's capital rules. A borrower with a 20 per cent deposit, strong income and a low debt-to-income ratio will usually access a better rate than someone borrowing at 90 per cent with multiple existing loans.

Working with a broker gives you access to a wider panel of lenders and rate options. We compare investment loan options from banks and non-bank lenders across Australia, and we know which lenders are offering discounts on specific loan types at any given time.

Loan to Value Ratio and Lenders Mortgage Insurance

Your LVR is the loan amount divided by the property value, expressed as a percentage. Borrow $450,000 to buy a $500,000 property and your LVR is 90 per cent.

Most lenders will lend up to 90 per cent LVR for an investment property, but anything above 80 per cent usually triggers Lenders Mortgage Insurance. LMI protects the lender if you default, and the premium is added to your loan or paid upfront. The cost rises steeply as the LVR increases.

Some lenders and professions qualify for LMI waivers at higher LVRs, which can save thousands of dollars. You can explore no LMI loan options if you're in an eligible occupation or meet specific lender criteria.

Keeping your LVR at 80 per cent or below avoids LMI entirely and usually gives you access to lower interest rates. If you already own property with equity, you may be able to use that equity as part of your deposit and reduce or eliminate the need for LMI on your next purchase.

Maximising Tax Deductions and Managing Claimable Expenses

Interest on an investment loan is deductible as long as the loan is used to buy or hold an income-producing property. Other claimable expenses include property management fees, council rates, insurance, body corporate fees, repairs and depreciation on the building and fixtures.

From the 2027-28 income year, losses on established investment properties bought after 12 May 2026 can only be offset against other residential property income, not against salary or wages. Properties bought before that date, or eligible new builds acquired after that date, continue to allow full negative gearing against all income. If you're weighing up whether to buy an established property or a new build in Cannon Hill, the difference in tax treatment is material and worth modelling before you commit.

Keeping your investment loan separate from any personal borrowing is important. If you refinance or redraw and mix funds, you can lose part of your deduction. Set up your loan structure correctly from the start and keep it clean.

When Refinancing Makes Sense

Refinancing an investment loan can lower your rate, access equity for another purchase, or switch your loan structure as your strategy changes. Investors often refinance to move from interest-only back to principal and interest as they approach retirement, or to release equity once a property has grown in value.

Before refinancing, check whether your current loan has exit fees, break costs on any fixed component, or deferred LMI that becomes payable if you leave within a certain period. A loan health check can confirm whether refinancing will leave you better off after costs.

Cannon Hill's proximity to the Gateway Motorway, Wynnum Road retail and the planned Cross River Rail precinct at Woolloongabba makes it an area where long-term capital growth is often part of the investor's plan. Refinancing to access equity from one property to fund a deposit on another is a common strategy for building a portfolio, and the structure of each loan matters.

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Frequently Asked Questions