The Easiest Way to Structure Your First Investment Loan

An investment loan determines how much rental income you need, how much tax you can claim, and how much equity you release when you acquire your next property.

Hawthorn sits within walking distance of both Glenferrie Road's retail precinct and Swinburne University, attracting a stable mix of professional renters and postgraduate students. The suburb's proximity to the city, established streetscapes and consistent rental demand make it a popular entry point for professionals looking to hold property long-term rather than trade frequently. Loan structure becomes the foundation that either supports or limits that strategy.

Does the Loan Amount Include Stamp Duty and Other Upfront Costs?

Most lenders will not include stamp duty, legal fees or lender costs in the loan amount for a residential investment property. You fund these costs separately from savings. Stamp duty in Victoria is calculated on the total purchase price using a tiered scale. Legal fees, building and pest inspections, and valuation fees are paid before or at settlement. If you capitalise lenders mortgage insurance into the loan, the total amount borrowed increases but the upfront cash required reduces.

In our experience, buyers underestimate settlement costs when calculating how much deposit they need. Consider a buyer purchasing an apartment near Glenferrie Road. Settlement costs including stamp duty, legal fees and building inspection might total $30,000 to $40,000 depending on purchase price. That amount is separate from the deposit and must be available in cash before settlement. If your deposit is 10 per cent and you have LMI, the total cash you need before settlement can exceed 15 per cent of the purchase price once all costs are included.

Interest Only or Principal and Interest Repayments?

Interest only repayments are lower than principal and interest repayments because you are not reducing the loan balance each month. Principal and interest repayments build equity over time and reduce the total interest cost across the life of the loan.

Interest only periods are typically approved for five years on a residential investment loan. At the end of that period, the loan converts to principal and interest unless you apply to extend. The benefit of interest only is that it maximises your monthly cashflow and your tax deduction, because the entire repayment is deductible as interest. The trade-off is that you do not reduce the loan balance during the interest only period, and your repayment will increase when the loan converts to principal and interest.

When rental income is marginal or when you plan to use equity from the property to fund your next purchase, interest only can support short-term cashflow while you build your portfolio. When rental income comfortably covers repayments or when you are focused on reducing debt rather than acquiring additional properties, principal and interest may be more suitable. Your choice should align with your income, your portfolio timeline and your capacity to service higher repayments when the interest only period ends.

What Is the Loan to Value Ratio and Why Does It Matter?

The loan to value ratio is the loan amount divided by the property value, expressed as a percentage. A loan of $500,000 on a property valued at $625,000 gives an LVR of 80 per cent. Lenders use the LVR to determine whether LMI is required and to set the interest rate and loan features available to you.

At 80 per cent LVR or below, you generally avoid LMI and access the widest range of loan products and lowest rates. Above 80 per cent, LMI is required and the premium increases as the LVR increases. Some lenders will lend up to 90 or 95 per cent for investment properties, but this is less common than for owner-occupied lending and depends on your income, employment type and the property location. The higher the LVR, the higher your repayment and the higher the capital risk if property values decline.

Hawthorn's established housing stock includes a mix of older apartment blocks and renovated period homes. Lenders apply different LVR policies depending on the age and type of property, with some requiring a lower maximum LVR for older or smaller apartments. Before you commit to a purchase, confirm the maximum LVR the lender will approve for that specific property type and location.

Variable Rate or Fixed Rate for Investment Property?

A variable rate moves with the lender's standard rate changes and allows you to make additional repayments or pay out the loan early without penalty. A fixed rate locks your interest rate for a set term, typically one to five years, and restricts additional repayments and early payout during the fixed period.

Investment property rates are typically higher than owner-occupied rates at the same LVR. The gap between variable and fixed rates changes over time depending on the lender's view of future rate movements. When you fix, you exchange flexibility for certainty. When you hold variable, you retain the ability to make lump sum repayments from rental income or salary, refinance without break costs, or access redraw if the loan permits it. Some investors split the loan, fixing a portion and leaving a portion variable. This reduces rate risk while preserving some flexibility. The split you choose should reflect how certain you are about your cashflow, how long you plan to hold the property, and whether you expect to refinance or draw equity within the fixed period.

If you are considering different loan structures or repayment options, our investment loans service covers the full range of investor products available across Australian lenders.

Can You Use Equity from an Existing Property as Your Deposit?

You can use equity from an owner-occupied property or another investment property as your deposit, provided the combined LVR across all properties does not exceed the lender's maximum. The lender values each property and calculates the total debt as a percentage of the total property value. If the combined LVR is 80 per cent or below, you may not require LMI. If it is above 80 per cent, LMI is calculated on the excess.

Consider a buyer who owns a home in Hawthorn East valued at $1.2 million with a loan of $600,000. The existing LVR is 50 per cent, which means the buyer has $960,000 in equity if the lender will lend to 80 per cent across both properties. If the buyer purchases an investment property for $700,000, the new total lending is $1.3 million against total property value of $1.9 million, giving a combined LVR of 68 per cent. No LMI is required. The lender provides a $700,000 loan secured against the investment property and may also take a second mortgage over the Hawthorn East home to reduce its risk. The buyer does not need to provide a cash deposit, but does need to pay stamp duty and settlement costs from savings.

Using equity instead of cash preserves your savings for other purposes and allows you to acquire property without selling an existing asset. The risk is that if either property falls in value or if your income reduces, your total debt position may become difficult to service or refinance. Lenders assess your capacity to service all loans, including the new investment loan, at the current rate plus the serviceability buffer, which is currently 3.0 percentage points.

How Does Rental Income Affect Your Borrowing Capacity?

Lenders include rental income when calculating your borrowing capacity, but they do not include 100 per cent of the rent. Most lenders apply a shading factor of 80 per cent to account for vacancy, maintenance and periods when the property is not tenanted. If the rent is $500 per week, the lender includes $400 per week as income in the serviceability assessment. Some lenders apply a lower shading factor depending on the location or property type.

The rental income offsets the loan repayment when the lender assesses whether you can afford the investment loan. If the rental income after shading is lower than the assessed repayment, the shortfall is added to your other debt commitments and reduces your borrowing capacity for future lending. If you own multiple investment properties, the lender aggregates all rental income and all investment loan repayments when calculating your total debt position. A high number of negatively geared properties can limit your ability to borrow further even if you have substantial equity.

If you are planning to build a portfolio over time, understanding how rental income is treated and how negative gearing affects your future borrowing capacity is critical before you purchase your first property.

What Loan Features Should You Prioritise?

An offset account linked to your investment loan reduces the interest charged without reducing your tax deduction, because the loan balance remains unchanged. Redraw allows you to withdraw additional repayments you have made, but depending on the lender's policy, accessing redraw may be slower or subject to conditions. Some lenders do not offer offset accounts on investment loans, or offer them only on variable rate products. Where offset is available, the interest rate may be higher than a loan without offset.

A loan with portability allows you to transfer the loan to a different property if you sell the current property and buy another without discharging and reapplying. This can save time and cost when you upgrade or relocate your investment. Portability is not available on all products and is subject to the lender's approval at the time you request the transfer.

Most investor loans allow you to switch between interest only and principal and interest during the life of the loan, subject to a new serviceability assessment. If your income changes or if you decide to reduce debt instead of acquiring more property, the ability to convert to principal and interest without refinancing can be useful. Some lenders charge a fee to switch repayment types, and others require a formal application.

For support with structuring your first or next property purchase, our mortgage broker in Hawthorn service is available to discuss your specific position and objectives.

What Debt-to-Income Limits Apply to Investment Lending?

From 1 February 2026, lenders regulated by APRA can lend no more than 20 per cent of their new investment loans to borrowers with a total debt-to-income ratio of six times or greater. Total debt includes all home loans, investment loans, personal loans and credit cards across all properties and purposes. Income is your gross annual income before tax. If your total debt is $900,000 and your gross income is $150,000, your DTI is six. If you apply for additional lending that takes your DTI above six, the lender may decline the application or require you to reduce other debt before proceeding.

The DTI limit applies at the lender level, not the borrower level, which means different lenders may have different capacity to approve your application depending on how much high-DTI lending they have already written in that quarter. Non-bank lenders are not currently subject to the DTI limit, but their rates and fees are generally higher than bank rates. The limit does not prevent you from borrowing if your DTI is above six, but it does narrow the range of lenders available and may require a larger deposit or higher income to proceed.

Understanding the DTI calculation and how it applies to your position is particularly relevant if you are a professional or business owner with strong income but existing debt from prior property purchases. Our loans for professionals service includes experience with high-income borrowers and lenders who can accommodate higher DTI ratios within their policy settings.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions