What Not to Do When Choosing Your First Investment Loan

The way you structure an investment loan today will affect your returns for the next decade.

If you're a Fremantle resident or medical professional weighing up your first investment property, the fundamentals have shifted. Changes to negative gearing rules, a borrowing cap tied to your income, and a ban on foreign buyers have all landed in the last eighteen months. The loans themselves haven't changed much, but how you use them and what you can claim has. The difference between getting this right and getting it wrong is measured in tens of thousands of dollars over the life of the loan.

Why Variable Rate Loans Still Dominate Investor Lending

Most property investors choose a variable rate because it offers flexibility without penalty. You can make extra repayments, redraw funds, and refinance without break costs. Fixed rates lock you in, and if your circumstances change or a lower rate appears, exiting early can cost thousands. For investors who plan to leverage equity or adjust their portfolio within a few years, that flexibility matters more than the certainty of knowing your rate.

Consider a Fremantle GP who buys a two-bedroom unit in South Fremantle as her first investment. She's planning to add a second property in three years once she builds equity. A variable rate lets her redraw funds for the next deposit or refinance to release equity without penalties. A fixed rate would require her to either wait until the fixed term ends or pay break costs that could run to several thousand dollars.

Interest Only Repayments and How They Fit an Investment Strategy

Interest only repayments keep your monthly cost lower and preserve cash flow. You're only paying the interest charged each month, not reducing the loan balance. The loan amount stays the same, which also means your tax deduction stays the same. For investors who want to maximise deductions or direct surplus income into other investments, interest only is a common choice.

The catch is that interest only periods are typically capped at five years, and lenders now apply tighter serviceability tests. After the interest only period ends, your loan reverts to principal and interest, and the repayment jumps. If you haven't planned for that, it can strain your budget. We regularly see investors who assume they'll refinance before the reversion happens, then find their borrowing capacity has tightened or their equity hasn't grown as expected.

The Quarantine Rule That Starts in July 2027

From 1 July 2027, rental losses on most investment properties purchased after 12 May 2026 can no longer be offset against your salary or other income. Those losses are quarantined and can only be used against future rental income or capital gains on residential property. The change doesn't affect properties you already own or those you contracted to buy before 12 May 2026.

There's an exception for new builds that add to housing supply. If you buy a property built on previously vacant land, or a development where the number of dwellings increased, you can still negatively gear under the old rules. A knock-down rebuild that replaces one house with one house doesn't qualify. A duplex replacing a single dwelling does.

This shifts the appeal of certain property types. A Fremantle buyer earning $180,000 who previously could offset a $12,000 annual rental loss against her taxable income will now need to carry that loss forward. If her marginal tax rate is 37 per cent, she loses an immediate $4,440 tax benefit each year. Over five years, that's more than $22,000 in deferred value.

Loan to Value Ratio and Why Lenders Mortgage Insurance Adds Up

Your loan to value ratio is the amount you borrow divided by the property value. Borrow more than 80 per cent and most lenders will require you to pay Lenders Mortgage Insurance. LMI protects the lender if you default, but you pay the premium upfront or capitalise it into the loan. On an investment property, LMI can run from a few thousand to more than $20,000 depending on your deposit size and loan amount.

For a $600,000 investment property in Fremantle with a 10 per cent deposit, LMI might add $15,000 to your loan. That's $15,000 you're paying interest on for the life of the loan, and it's not a claimable expense in the year you pay it. You can claim it as a deduction, but it's spread over five years or the life of the loan, whichever is shorter. A larger deposit avoids LMI entirely and keeps your loan amount lower, which also makes it easier to meet the new debt to income cap.

Debt to Income Cap and How It Limits Investor Borrowing

Since February this year, lenders can only write up to 20 per cent of their new investor loans at a debt to income ratio of six times or higher. If you earn $150,000, your total borrowing including investment and owner-occupied debt can't exceed $900,000 if you fall into that 20 per cent bucket. Most lenders are managing this by tightening criteria across the board, so even if you're under the cap, you might find your borrowing capacity has dropped compared to last year.

This limit is separate from the serviceability buffer, which adds three percentage points to your interest rate when the lender tests whether you can afford the loan. Both rules apply, and both reduce how much you can borrow. For medical professionals with high incomes, the cap is less likely to bind, but for households with moderate income and existing debt, it can be the hard ceiling.

How Rental Income Is Assessed and Why Vacancy Rate Matters

Lenders don't count your full rental income when assessing serviceability. Most will take 80 per cent of the advertised rent to allow for vacancy, maintenance and periods without a tenant. If the property rents for $600 a week, the lender will use $480 in their calculations. That $120 shortfall comes off your borrowing capacity.

In areas with low vacancy rates like Fremantle, where rental stock is tight and tenant demand is consistent, the actual vacancy risk might be lower than the lender's assumption. That doesn't change the calculation. The 80 per cent shading is a standard policy, not a reflection of your specific property or suburb.

Claimable Expenses Beyond Interest and Depreciation

Interest on your investment loan is deductible. So are property management fees, council rates, water rates, landlord insurance, repairs and maintenance, and body corporate fees if you own a strata unit. Depreciation on the building and fixtures adds another layer, though recent changes limit depreciation on second-hand plant and equipment for properties purchased after certain dates.

What you can't claim immediately is the cost of improvements that add lasting value, such as renovating a kitchen or adding a second bathroom. Those costs are added to your cost base and reduce your capital gain when you sell. Stamp duty is also added to the cost base, not claimed as an annual deduction.

Mixing these up is common. In our experience, first-time investors often assume every dollar spent on the property is immediately deductible. A qualified accountant who works with property investors will sort this out at tax time, but knowing the distinction upfront helps you forecast your actual after-tax return.

Refinancing an Investment Loan and When It Makes Sense

You refinance an investment loan for the same reasons you'd refinance any loan: a lower rate, better loan features, or to release equity for another purchase. The difference is that investment loans are judged on serviceability, not urgency. If your rental income and personal income don't support the new loan amount under current lending rules, the refinance won't proceed no matter how much equity you have.

Refinancing also lets you switch from interest only back to another interest only term if your lender approves it, or move from a variable rate to a split structure. Just be clear on your reason for refinancing. Rate chasing when the benefit is half a per cent might not justify the application cost and time if you're planning to release equity in six months anyway. If you're planning to grow your portfolio or considering a refinance to access equity for your next purchase, timing matters more than squeezing out the lowest rate today.

Red Sea Lending works with residents and medical professionals across Fremantle who are adding investment property to their wealth plan. If you're weighing up your first investment loan or trying to figure out how the recent rule changes affect your borrowing capacity and tax position, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions