Understanding the basics of Investment Loans

Property Investment Loans Start With Your Current Position

An investment loan is secured against a property you intend to rent out rather than live in. Lenders assess investment loans differently to owner-occupier loans because the repayments rely partly on rental income, which can fluctuate if a tenant leaves or the property sits vacant. North Adelaide investors typically look at nearby suburbs where rental demand from university students, hospital staff and inner-city workers remains consistent throughout the year.

The loan amount you can borrow for an investment property depends on your income, existing debts, living expenses and the rental income the property is expected to generate. Lenders generally apply a serviceability buffer of at least 3.0 percentage points above the loan product rate when assessing your capacity to service the loan. That means if the variable rate on offer is 6.2 per cent, the lender tests whether you can afford repayments at 9.2 per cent or higher. They also factor in a vacancy rate, usually around 4 to 5 per cent of the annual rent, to account for periods when the property may be untenanted.

Consider someone working in the medical sector at the Royal Adelaide Hospital who already owns their home in North Adelaide and wants to purchase a unit in Prospect or Fitzroy as a rental property. The lender will look at their salary, the repayments on their existing home loan, their living costs, and the projected rental income from the investment property. If the rental income doesn't fully cover the investment loan repayments, the borrower needs to demonstrate they can service the shortfall from their own income while still meeting all other commitments.

What Deposit Do Lenders Expect for an Investment Loan?

Most lenders require a minimum 10 per cent deposit for investment loans, though some will lend at 20 per cent deposit to avoid Lenders Mortgage Insurance. If you borrow above 80 per cent of the property value, LMI is generally required. The premium is calculated based on the loan amount and the loan-to-value ratio, and can add several thousand dollars to your upfront costs. LMI protects the lender if you default, not you as the borrower, but it does allow you to enter the market sooner if you don't have a full 20 per cent deposit saved.

You can also use equity in your existing home as part or all of your deposit. If your North Adelaide home has increased in value and you have paid down some of the loan, you may be able to borrow against that equity rather than providing cash. The lender will value both properties and calculate the combined loan-to-value ratio across your portfolio. You still need to service both loans, so your borrowing capacity becomes the limiting factor rather than the deposit itself.

Interest Only or Principal and Interest Repayments?

Interest-only investment loans allow you to pay only the interest portion each month, which reduces your repayments and may increase your cash flow, particularly if the property is negatively geared. The interest-only period is typically between one and five years, after which the loan reverts to principal and interest repayments unless you negotiate an extension. Some investors prefer interest-only loans because it maximises their tax deductions while they hold the property, as the full interest amount remains deductible. Others choose principal and interest from the outset to reduce the loan balance over time and build equity faster.

Under current prudential rules, a long-term interest-only loan with an LVR above 80 per cent and an interest-only period greater than five years is classified as non-standard, which affects the lender's capital requirements and may influence pricing or availability. If you are considering an interest-only structure, it's worth discussing the term length and revert rate with your broker before you commit. Repayments can increase substantially when the loan switches to principal and interest, and you need to be confident you can manage that step up when it arrives.

Variable Rates or Fixed Rates for Investment Property?

Variable rate investment loans move up or down in line with changes made by the lender, which are usually influenced by Reserve Bank decisions and funding costs. A variable rate gives you flexibility to make extra repayments or pay the loan out early without penalty, and you benefit immediately if rates fall. Fixed rate investment loans lock in a rate for a set period, typically between one and five years. You gain certainty over your repayments, but you may face break costs if you need to exit the loan early or refinance before the fixed period ends.

Some investors split their loan between fixed and variable, which provides partial rate protection while retaining some flexibility. If you are holding the property long term and want to budget with certainty, a fixed portion can help. If you plan to sell within a few years or expect to access equity for further purchases, keeping at least part of the loan variable may be more practical. Your decision should reflect your income stability, your broader investment strategy, and your tolerance for repayment fluctuations.

Negative Gearing and Tax Treatment Under Current Rules

For properties held at 7:30pm AEST on 12 May 2026, including properties under contract at that time, losses from residential investment properties continue to be fully deductible against other income, including salary and wages, until the property is sold. That means if your rental income and deductions, including interest, body corporate fees, insurance, repairs and property management, exceed your rental income, you can offset that loss against your wage or salary income and reduce your overall tax.

From the 2027-28 income year, losses on established residential investment properties acquired after 7:30pm AEST on 12 May 2026 are deductible only against other income from residential properties, including capital gains on residential properties. Excess losses can be carried forward to offset residential property income in future years. If you purchase an established apartment in Prospect after that date, any loss can only be used to reduce income or gains from other residential investments. It cannot reduce your salary income in the same way.

New builds, including dwellings constructed on previously vacant land and dwellings replacing existing properties where the number of dwellings increases, remain eligible for negative gearing under the previous rules. Knock-down rebuilds that do not increase dwelling numbers, and substantial renovations, are not eligible. If you are weighing up an established unit near Melbourne Street versus a new townhouse development in Prospect, the tax treatment may influence your decision, particularly if you expect the property to run at a loss in the early years.

Capital Gains Tax Changes From July 2027

The 50 per cent CGT discount continues to apply to capital gains accruing on all residential property, including investment properties, up until 1 July 2027, for individuals, trusts and partnerships who have held the asset for more than 12 months. From 1 July 2027, the 50 per cent CGT discount is replaced by cost base indexation using CPI and a 30 per cent minimum tax rate on real capital gains accruing from that date. For assets owned before 1 July 2027 and sold after that date, gains are taxed under the current rules for the portion accruing before 1 July 2027 and under the new rules for the portion accruing after that date.

If you sell an investment property in North Adelaide or a nearby suburb after 1 July 2027, you will need to either obtain a market valuation as at 1 July 2027 or apply an ATO-published apportionment formula to split the gain between the two periods. For investors in eligible new build residential properties, both the existing 50 per cent CGT discount and the new indexation and 30 per cent minimum tax arrangements are available as a choice at the time of disposal. This gives new build investors more flexibility when they eventually sell.

Borrowing Capacity and Debt-to-Income Limits

From 1 February 2026, each lender may lend up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. The limit applies separately to investor lending and owner-occupier lending. If your total debt, including your home loan and the proposed investment loan, is more than six times your gross income, you may still be approved, but the lender has less room within their quarterly limit.

In our experience, North Adelaide medical professionals often have strong incomes but also carry existing home loans on properties in the area. If you are borrowing close to that six-times threshold, lenders will scrutinise your living expenses and existing commitments closely. You may be asked to provide additional documentation, such as recent payslips, tax returns, and a breakdown of rental income from any properties you already own. The DTI limit does not prevent you from borrowing, but it does mean lenders apply closer attention to applications near or above that ratio.

Choosing the Right Investment Loan Structure

The loan structure you choose should reflect your investment strategy, your tax position, and your plans for the property. If you intend to hold the property for ten years or more and reinvest the rental income into further purchases, an interest-only loan may suit you in the early years. If you plan to sell within five years or want to reduce debt as you approach retirement, principal and interest repayments may be a better fit.

You also need to consider offset accounts and redraw facilities. Most investment loans with a variable rate component offer redraw, which lets you access any extra repayments you have made. Some lenders offer offset accounts on investment loans, though they are less common than on owner-occupier loans. An offset account linked to an investment loan can reduce the interest you pay, but it also reduces the interest you can claim as a tax deduction. If tax efficiency is your priority, paying the full interest and keeping your savings elsewhere may make more sense.

Red Sea Lending works with a panel of lenders across Australia, which gives you access to a range of investment loan options that are not always visible through a single bank. We compare loan features, interest rates, and fee structures to find a product that aligns with your circumstances. Whether you are purchasing your first investment property or adding to an existing portfolio, we can walk you through the options and help you understand how each feature affects your repayments and tax position.

Call one of our team or book an appointment at a time that works for you. We meet investors at all stages, from those just starting to explore property investment through to those refinancing or restructuring their existing loans.

Frequently Asked Questions