If you are thinking about buying an investment property in Melbourne, the structure of your investment loan matters just as much as the property you pick.
Your loan decides how much you can borrow, what you pay each month and how any rental loss is treated at tax time. Getting the setup right before you make an offer gives you far more choice. Let's walk through it.
How Much Can You Borrow for an Investment Property?
Your investment loan amount depends on your income, your debts, your living costs and the lender's own policy. Authorised deposit-taking institutions (banks, credit unions and building societies) must assess your ability to repay at a rate at least 3.0 percentage points above the loan rate. Non-bank lenders are not bound by the APRA buffer, but they usually run their own serviceability tests.
That buffer is set by APRA. It means a loan that feels comfortable at today's rate still has to pass a tougher test on paper. Credit cards count too, because lenders generally assess them on the limit rather than the balance. Ask your broker how your lender treats your card limits.
Rental income helps, but only part of it counts. APRA's guidance says prudent lenders count no more than 80 per cent of expected rent, to allow for gaps between tenants. Lenders also tend to place less weight on a rental appraisal than on actual rent received. You can get a starting figure from our borrowing capacity page, and a broker can then check it against lender policy.
Interest Only or Principal and Interest: Which Suits an Investor?
Interest only means you pay just the interest for a set period, while principal and interest means each repayment also reduces the loan. Interest only lowers your repayments for a time, but your loan balance stays the same.
The trade-off is that the balance does not fall, and the repayments rise when the loan reverts to principal and interest. Lenders also assess an interest-only loan as if you will repay principal over the shorter remaining term. So interest only does not increase how much you can borrow.
As an illustration, take a buyer with a $600,000 loan on a 30-year term at an example rate of 6.75% p.a. Principal and interest repayments would be about $3,892 a month. Interest only would be $3,375 a month, which is $517 less. If the buyer chose five years of interest only, the loan would then switch to principal and interest over the remaining 25 years. At the same 6.75% example rate, the repayment would rise to about $4,145 a month, which is $253 more than the 30-year figure. That is the cost of the lower early repayments. Use our mortgage repayment tools to test your own numbers.
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Deposit, LVR and Lenders Mortgage Insurance for Investors
Borrowing above 80 per cent of the property's value means a deposit of less than 20 per cent. Lenders generally require lenders mortgage insurance (LMI) and apply their own stricter policy above that point. LMI is paid by you, and it protects the lender, not you.
The 80 per cent loan to value ratio (LVR) is not a legal limit. It is the point where LMI is generally needed, and each lender sets its own cap above it. Borrowing above 80 per cent needs approval from both the lender and the insurer. The premium depends on the loan amount and LVR, and stamp duty may apply to it. Your investor deposit also needs to cover Victorian stamp duty and other purchase costs, so ask your broker to map these out before you sign a contract.
Negative Gearing Rules Have Changed for New Purchases
For established homes bought after 7:30pm AEST on 12 May 2026, rental losses will only be deductible against other residential property income from the 2027-28 income year. Until 30 June 2027, those properties can still be negatively geared under the current rules.
Losses from eligible new builds bought after that date can still be deducted against all income. Eligible new builds include dwellings built on previously vacant land, and replacements that increase the number of dwellings. Knock-down rebuilds that add no dwellings, and substantial renovations, do not qualify. The change affects how a loss can be used. It does not change whether interest on a rental property loan is deductible. Only the interest part of your repayment is deductible, not the principal. Tax outcomes depend on your situation, so speak with your accountant before you decide between a new build and an established property.
A Scenario: Choosing Between Two Loan Structures
Consider a Melbourne couple buying their first rental with a deposit of 20 per cent and a loan of $500,000. They are weighing up interest only against principal and interest.
Their broker runs both at the 6.75% p.a. example rate over 30 years. Principal and interest comes to about $3,243 a month, and interest only comes to about $2,813 a month, a difference of $430. Because lenders assess interest-only loans over the shorter principal-and-interest term, the couple's borrowing capacity is no higher with interest only. Rent covers part of the cost either way.
The broker suggests principal and interest with an offset account. The offset reduces the interest charged on the loan without reducing the loan balance, so the interest incurred is lower. The trade-off is a higher monthly repayment and possibly a higher fee for the offset feature, depending on the lender. The couple accept the higher repayment because they want the debt falling from day one. The outcome is a loan that sits within their budget and keeps the balance moving down, with the tax treatment confirmed by their accountant.
Using Equity in a Home You Own to Buy a Rental
You can use equity in your current home as a deposit for an investment property, but the loan taken against that equity must be set up carefully. Interest is deductible based on how the borrowed money is used, not on which property secures the loan.
Borrowing against your home to buy a rental generally means the interest on that portion relates to the rental. Using part of it for a holiday or a car would not be deductible. Many investors keep these as separate loan splits so the purposes stay clear. The risk is that two properties now secure your debt, so a fall in values or a missed repayment affects both. If you already own a home with a loan, a loan health check is a good place to start, and our refinancing team can explain how a refinance may release equity.
Variable or Fixed Rate on an Investment Loan
A variable rate moves with the lender's pricing, while a fixed rate stays the same for a set period. Variable loans usually allow extra repayments and offset accounts, and fixed loans may limit them.
Fixed loans can give certainty when you are budgeting around rent. The trade-off is that you may face break costs if you repay early or refinance during the fixed term, and the features can differ by lender. Some investors split the loan so part is fixed and part is variable. Ask how the lender handles each feature before you choose. Our investment loans page covers the options we can access from lenders across Australia.
The right structure comes down to your goals, your budget and how much risk you are comfortable with. Call one of our team or book an appointment at a time that works for you, and we will compare lenders and shape a loan around your plan.
Frequently Asked Questions
Does an interest-only loan increase how much I can borrow?
No. Lenders assess interest-only loans on repayments over the shorter remaining principal and interest term. That means borrowing capacity is not higher with interest only.
How much of my rental income will a lender count?
APRA's guidance says prudent lenders count no more than 80 per cent of expected rent. Each lender also sets its own policy on what rental evidence it accepts.
Is the interest on my investment loan tax deductible?
Interest on money borrowed to buy or hold a rental property is generally deductible while the property is rented or available for rent. Only the interest part of a repayment counts, not the principal, so check your situation with your accountant.
Do I need lenders mortgage insurance for an investment property?
LMI is generally required when your loan is above 80 per cent of the property's value. Each lender and insurer sets its own approval rules above that point.
