Why Investment Loan Features Matter Before You Buy

The right investment loan features can matter as much as the interest rate. For Warrandyte residents, the aim is to choose a structure that suits your cash flow today and still works when your repayments change.

You may know Warrandyte's Yarra River setting and Warrandyte State Park well, but a lender looks at the numbers behind a property. This article explains the features worth comparing, how they affect your repayments, and where tax advice comes in.

Which Investment Loan Features Are Worth Comparing?

The features that usually matter most are the repayment type, the rate type, an offset account and how the lender counts your rental income. Each one has a trade-off, so the useful question is which one fits your plan.

Rate type is the first choice. A variable rate moves with the lender's decisions and often allows extra repayments or an offset account. A fixed rate gives repayment certainty for a set period, but break costs may apply if you exit early, and some fixed loans limit extra repayments or offsets. A split loan lets you hold part of the loan in each, which spreads the risk without removing it.

These features vary from lender to lender. That is why it helps to compare investment loan options from several lenders rather than only your current bank.

Interest Only or Principal and Interest: What Changes?

An interest-only loan has lower repayments during the interest-only period, but the loan balance does not fall. When the period ends, repayments rise because the principal must be repaid over a shorter remaining term.

Consider a Warrandyte buyer taking a $500,000 investment loan at an illustrative rate of 6.75% p.a. over 30 years, with five years of interest only. The same rate is used throughout this example.

• Interest only: about $2,813 a month.
• Principal and interest over 30 years: about $3,243 a month.
• Principal and interest after the interest-only period, over the remaining 25 years: about $3,455 a month.

The buyer saves roughly $430 a month for five years compared with principal and interest from day one. But the repayment then jumps by about $642 a month, and the balance is still $500,000. The buyer plans for this by setting aside part of the monthly saving and reviewing the loan before the period ends. The outcome is a planned step up rather than a surprise.

Lenders also assess interest-only loans on the principal and interest repayments over the remaining term, so choosing interest only does not increase how much you can borrow. Our borrowing capacity page explains how lenders work out your limit.

How Does an Offset Account Affect Your Tax Deductions?

An offset account reduces the balance your interest is charged on. That means the interest you incur is lower, so the interest deduction is lower too, even though your cash position is stronger.

The offset does not reduce the loan balance. It also does not reduce the loan amount a lender uses to work out your loan-to-value ratio (LVR). The trade-off is that some loans charge an annual fee or a higher rate to attach an offset, so check the cost against the interest you expect to save.

Redraw works differently. Under ATO ruling TR 2000/2, a redraw is treated as a new borrowing, and whether the interest is deductible depends on what you use the money for. Redrawing funds for a personal expense, such as a holiday, means the interest on that part is not deductible. Interest on borrowings used to hold a rental property is generally deductible, but only the interest part of a repayment, not the principal. Speak with your accountant about how this applies to you.

How Do Lenders Count Rental Income on an Investment Loan Application?

Banks and other authorised deposit-taking institutions generally count no more than 80% of expected rent when they assess an application. This allows for periods when the property is vacant.

That 20% reduction is a minimum expectation from APRA, and it does not cover management fees or repairs. Lenders also tend to place less weight on a rental appraisal than on actual rent received. Each lender sets its own rules on what rental evidence it accepts, so the same property can produce different results at different lenders.

Banks must also test your ability to repay at a rate at least 3 percentage points above the loan's rate. In practice, this means you need to be comfortable with repayments at a much higher rate than the one on your offer.

How Much Deposit Do You Need for an Investment Loan?

Borrowing above 80% of the property's value usually means paying Lenders Mortgage Insurance (LMI), and each lender sets its own limits above that point. The 80% mark is a lender policy trigger, not a legal borrowing cap.

LMI is paid by the borrower and is worked out on the loan amount and LVR. Its main cost is the extra upfront expense. The alternative is a larger deposit, which can mean waiting longer to buy. If you already own your home, you may be able to use equity as part or all of the deposit. Doing so raises your total debt, and borrowing against equity does not make the interest deductible on its own. The deduction depends on how you use the funds.

What Have the Negative Gearing Changes Done to Investment Planning?

Negative gearing rules now depend on when you acquired the property. Properties held at 7:30pm AEST on 12 May 2026 keep full deductibility of rental losses against other income, as do eligible new builds acquired after that date.

From the 2027-28 income year, net rental losses on established residential properties acquired after that time can only be used against other residential property income, with excess losses carried forward. This does not change whether interest is deductible, but it changes how a loss can be used. It also makes cash flow more important, because you may not be able to rely on a tax offset to cover a shortfall. Your accountant can explain how this applies to your circumstances.

When Should You Review Your Investment Loan?

Review the loan when a fixed rate or interest-only period is ending, or when your circumstances change. A review shows whether your features still suit you or whether an investment loan refinance could help.

Refinancing may involve discharge fees and valuation costs, and a new lender will reassess your finances. Those costs need to be weighed against what you would gain. If you want a local contact, our Warrandyte mortgage broker page has the details.

Call one of our team or book an appointment at a time that works for you, and we will walk through the features that suit your investment plan.

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