The Pros and Cons of Investment Loan Structures

The way you set up your investment loan matters more than the rate you pay on it.

Most investors focus on securing the lowest interest rate, but the structure you choose determines which tax concessions you can access, how much equity you can use for your next purchase, and whether you can adapt when regulation changes. That structure includes how much you borrow, whether you split the loan across multiple facilities, and how you set up repayment and offset arrangements. Getting it right before settlement gives you options. Getting it wrong locks you into constraints that cost thousands to unwind.

Interest Only or Principal and Interest Repayments

Interest only repayments reduce your monthly outgoings and maximise your tax deductions during the investment phase. When you hold a property to generate passive income rather than to occupy it, every dollar of interest on the loan used to acquire or hold that property is deductible against your rental income. Paying down the principal reduces your loan balance but also reduces the deductible interest you can claim each year. If you hold the property for capital growth and plan to use equity for further portfolio growth, keeping the loan balance higher preserves your deductibility and frees up cash flow for other investments.

Interest only terms with most lenders run for five years on investment loans, after which the loan reverts to principal and interest unless you apply to extend. Not all lenders allow extensions, and approval depends on your income, the property's value and your overall debt position at the time. If rental income alone does not service the higher principal and interest repayment, you may need to refinance or contribute additional funds. Many investors in Double Bay hold properties in the eastern suburbs or inner ring where vacancy rates are low and rental demand from professionals is consistent, which supports serviceability when the interest only period ends.

Variable Rate or Fixed Rate Investment Loans

Variable rate loans give you full access to offset accounts and allow unlimited extra repayments without penalty. For investment properties, an offset account linked to a variable rate loan allows you to park surplus funds and reduce the interest charged without reducing the loan balance or your tax deductions. The loan balance remains the same, so the full interest amount stays deductible, but the interest you actually pay is calculated on the reduced balance. This setup suits investors who have irregular income, bonuses or cash reserves they want to use without permanently paying down the loan.

Fixed rate loans lock in your repayment for a set term, typically one to five years, and protect you from rate increases during that period. The trade-off is limited or no offset access, restrictions on extra repayments, and break costs if you repay or refinance before the fixed term ends. Some investors split their loan across variable and fixed portions to balance flexibility with certainty. A 50/50 split allows you to use offset on the variable portion while locking in repayments on the fixed portion. That split also reduces break costs if you refinance, because only the fixed portion incurs penalties.

Splitting Loans Across Multiple Accounts

Splitting your total borrowing into separate loan accounts gives you control over how you use equity and how you manage refinancing. Each split operates as a standalone facility with its own balance, rate and terms. One common structure is to split the loan into a portion that matches your deposit and a portion that covers the balance, with the smaller split set to variable and linked to an offset. This allows you to build equity in the offset portion and release it without refinancing the entire loan.

Another reason to split is tax quarantining. Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, net rental losses from residential properties acquired on or after 7:30pm AEST on 12 May 2026 are quarantined from 1 July 2027. Those losses can only be offset against residential rental income or carried forward. If you own a mix of grandfathered properties and post-May 2026 properties, keeping the loans in separate accounts makes it clearer which interest expenses belong to which property and how losses should be allocated. Lenders do not track tax treatment, so the responsibility sits with you and your accountant.

Loan to Value Ratio and Lenders Mortgage Insurance

Your loan to value ratio determines whether you pay Lenders Mortgage Insurance and how much equity you can access for future purchases. LMI is a one-off cost charged when you borrow more than 80 per cent of the property's value, and it protects the lender if you default. The premium increases as your LVR increases, and it can add several thousand dollars to your upfront costs. Some lenders offer professional LMI waivers that allow eligible borrowers to borrow up to 90 or 95 per cent without paying the insurance. Those waivers typically apply to owner-occupied purchases, but a small number of lenders extend them to investment loans for professionals in finance, legal, medical and accounting fields.

If you purchase at 80 per cent LVR or below, you avoid LMI and retain more equity for your next investment. That equity can be released by refinancing or by taking out a separate loan secured against the existing property. The amount you can release depends on how much the property has increased in value and how much of the loan you have paid down. Most lenders allow you to borrow up to 80 per cent of the current value without paying LMI again, so if your property has appreciated, the difference between your current loan balance and 80 per cent of the new value is available equity.

How Debt-to-Income Caps Affect Loan Structures

From 1 February 2026, lenders are limited in how much they can lend to borrowers with debt-to-income ratios of six times or greater. The cap applies separately to investor loans and owner-occupied loans, with up to 20 per cent of new lending in each category allowed at or above that threshold. If your total debt across all loans is more than six times your gross annual income, you may find your borrowing capacity reduced or your application declined by lenders who have already reached their cap for the quarter.

Structuring your investment loan to stay below that threshold may require a larger deposit, using equity from an existing property, or bringing in a co-borrower. Some investors bring in a partner or spouse to increase combined income, but that also increases combined debt when calculating the ratio. Others delay a purchase to pay down existing debt or increase their income through a new role or a pay rise. In areas like Double Bay, where investors often hold both an owner-occupied property and one or more investment properties in the same postcode or nearby suburbs, the DTI cap can limit portfolio growth unless you plan for it in advance.

Structuring for Capital Gains Tax and Future Tax Changes

The structure you choose now affects your capital gains tax position when you sell. Under current rules, individuals who hold an investment property for more than 12 months receive a 50 per cent discount on the capital gain. From 1 July 2027, gains accruing after that date on properties acquired on or after 7:30pm AEST on 12 May 2026 will be taxed under a new indexed cost base system with a minimum 30 per cent tax rate on real gains. The 50 per cent discount will no longer apply to those gains, although it remains for gains accrued before 1 July 2027 and for grandfathered properties.

If you are purchasing a property now with a view to holding it for ten or twenty years, the tax treatment on sale will blend the old and new rules. The portion of the gain that accrued before 1 July 2027 is taxed under the 50 per cent discount. The portion that accrues after that date is taxed under the indexed system. Structuring your loan to minimise non-deductible debt, such as keeping your owner-occupied debt separate and ensuring all borrowings for the investment are fully deductible, will maximise your tax efficiency during the holding period and reduce the taxable gain when you sell.

Using Equity to Fund Further Investment Without Cross-Collateralisation

When you use equity from one property to fund a deposit on another, lenders often cross-collateralise the loans by taking security over both properties. That means both properties secure both loans, and you cannot sell or refinance one property without the lender's consent on the other. Cross-collateralisation simplifies the lending process and may reduce costs, but it reduces your flexibility if you want to switch lenders or sell one property without disturbing the other loan.

An alternative structure is to keep the loans separate and provide security over each property only for the loan attached to it. Not all lenders allow this, particularly when you are borrowing at a high LVR, but it gives you the option to refinance one loan or sell one property without triggering a review of your entire portfolio. In our experience, investors who intend to build a portfolio of three or more properties benefit from structuring for separation early, because unpicking cross-collateralised loans later involves legal costs, discharge fees and revaluation costs on multiple properties.

Call one of our team or book an appointment at a time that works for you. We work with borrowers across Double Bay and the eastern suburbs to structure investment loans that align with your tax position, borrowing capacity and growth plans.

Frequently Asked Questions