Around 2.26 million Australians own at least one investment property (ATO, 2022–23), and 72% of them own just one. The typical Australian property investor isn’t a tycoon with a portfolio of twenty rentals. It’s a mum and dad couple with one place they bought to build something for the future.
An investment loan is the lending side of that story. It’s how most Australians actually pay for the property (or shares) they’re investing in. The mechanics are different to a regular home loan, the costs are different, and the tax side is something your accountant needs to be involved in from the start.
This article walks through what an investment loan actually is, how it works in Australia, what to think about before going down that path, and where the lending part of the conversation fits in. The strategy side, what to invest in and whether to invest at all, is one your financial planner needs to be part of.
What is an investment loan?
An investment loan is a loan used to buy or hold an asset that’s expected to generate income or grow in value over time. The most common type is an investment property loan, but the term also covers loans used to buy a share portfolio or to release equity from an existing property to invest elsewhere.
From a lender’s point of view, an investment loan is treated differently to an owner-occupier home loan. The reason is simple: an investment property is something you can sell or stop paying for if things get tight, where your home is the last debt anyone walks away from. Lenders factor that risk into how they price and structure the loan.
In practice, this means investment loan rates are usually slightly higher than owner-occupier rates, and lenders look more closely at how the rental income (or share returns) stack up against the repayments.
How investment loans work in Australia
Most investment loans look a lot like a normal home loan from a distance. Up close, there are some differences in how lenders assess them and how the loan is usually structured.
A worked example
Let’s say John and Mary own their home, currently worth $800,000, with $300,000 still owing on the mortgage. So they have $500,000 in equity. They want to buy a $600,000 investment property.
They have two main ways to fund it. They can refinance their existing home loan to release some of the equity (say, $150,000) and use that as the deposit and costs on the new property. They then take out an investment loan for the remaining $450,000. Both loans sit alongside each other, but they’re separate.
Or, they can use a single loan structure where the new property is bought with cross-collateralised lending against both homes. This can be simpler at first, but it ties the two properties together in a way most people don’t want long-term.
Either way, John and Mary now own two properties. They live in one, rent out the other, and the rent helps cover the investment loan repayments. Whether the rent fully covers them, only partly covers them, or covers them with a bit left over depends on the rate, the property, and the rental market.
Whether option one or option two suits their situation is mostly a structuring question. Their accountant and a broker who looks at the whole picture together can walk them through it.
Principal and interest, or interest-only
On most home loans, your repayments include both interest and a chunk of the loan balance (the principal). Over time the loan balance shrinks.
Investment loans often run on “interest-only” for an initial period (commonly five years). During that time, the repayments only cover the interest. The loan balance doesn’t go down. After the interest-only period ends, the loan reverts to principal and interest.
Why people use interest-only on investments: the repayments are lower in the short term, which helps cash flow, and many investors prefer to focus their extra repayments on their owner-occupier loan (which doesn’t have the same tax treatment). Whether interest-only suits your situation is a tax and strategy question. Your accountant is the right person to settle that.
How much you can borrow
Investment loans are usually capped at a lower loan-to-value ratio (LVR) than owner-occupier loans. Most lenders cap investment lending at around 80%-90% of the property value, depending on the lender and the borrower’s situation. Higher LVRs are possible but usually require lenders mortgage insurance (LMI).
Lenders also look at how much of the rental income they’ll count when assessing borrowing capacity. Most use around 75% to 80% of the expected rent (the rest is held back to cover vacancy periods, agent fees, and maintenance).
Investment loans for shares
Most investment loans in Australia are for property, but it’s also possible to use lending against equity in an existing property to invest in shares or a managed fund. The mechanics on the lending side are similar to property: a loan secured against the home, with the funds released for investment. Whether borrowing to invest in shares makes sense for your situation is firmly a financial planner question, not a broker one.
What lenders look at
When you apply for an investment loan, the lender will look at:
- Your income (employment, business, or both)
- Your existing debts and how you’ve handled them
- The expected rental income from the new property
- Your equity in any existing properties
- Whether the application stacks up if interest rates rose by 2-3% (the “assessment buffer”)
Things to consider before taking out an investment loan
Investment lending isn’t the right move for everyone, and it’s worth thinking through the trade-offs before signing up. Things worth weighing up:
- Cash flow gap. Even when an investment property is rented out, the rent often doesn’t fully cover the loan repayments, rates, insurance, and maintenance. The shortfall comes out of your pocket each month. Worth knowing what that gap looks like before committing.
- Vacancy and bad tenants. A rental property without a tenant still has a loan attached. Even good tenants miss payments occasionally. A buffer of two or three months of repayments in savings is sensible.
- Property markets don’t only go up. Property has historically grown in value over the long term, but it doesn’t move in a straight line. The property might be worth less than you paid for it for periods of time. Long-term thinking and patience matter.
- Negative gearing isn’t a strategy on its own. Negative gearing means the rental income is less than the costs, and the difference is treated as a tax deduction. It can soften the cash flow gap, but it’s only worth doing if the underlying investment is sound. “It’s tax-deductible” is not a reason to invest in something. Your accountant is the right person to walk you through what negative gearing actually means for your tax position.
- Loan structure matters more than people realise. How the loan is set up affects what you can deduct, how flexible you are later, and how easy it is to add a second investment property down the track. Cross-collateralising your home with the investment can cause problems years later. Worth getting the structure right at the start.
- Interest rates won’t stay where they are forever. Lenders apply an assessment buffer for a reason. If your numbers only work at today’s rates, the loan is more fragile than it should be. Run the numbers at a higher rate before signing.
- The strategy is not a lending question. Whether to invest, what to invest in, and how it fits with your overall financial plan are questions for your accountant and financial planner, not your broker. A broker’s job is the lending side once those decisions have been made.
A good investment loan conversation includes a frank look at all of these. If a broker is leading with how much you can borrow and skipping the structure, the cash flow, and the buffer, that’s a red flag.
Who investment loans suit
Investment loans tend to make sense for:
- People who already own their home and have built up equity
- Stable income earners who can absorb the cash flow gap on a rental property
- Investors with a clear long-term horizon (ideally ten years or more)
- People working with both an accountant and a financial planner
- Existing investors looking to refinance or restructure loans across a portfolio
It tends to be the wrong fit when:
- The cash flow gap can’t be covered without strain
- There’s no buffer for vacancy, repairs, or rate rises
- The investment is being driven by tax savings rather than the asset itself
- The strategy hasn’t been signed off by an accountant or financial planner
- The buyer is stretched thin already and would be over-leveraged with another loan
The right answer depends on the full picture. Your income, your existing debts, your equity, your goals, and the asset you’re looking at all play a part.
How Equity Cube can help
If you’ve worked through the strategy with your accountant and financial planner and you’re ready to look at the lending side, the next step is comparing what’s available across the investment loan market and getting the structure right from the start.
That’s the kind of conversation we have at Equity Cube. We compare options across our lending panel for new investment loans, refinances, and equity release, and walk you through the structure in plain language. If now isn’t the right time to take on an investment loan, we’ll tell you that too.