Investment Loans and What to Know Before You Buy

An investment loan works differently to your home loan, and those differences matter the moment you start looking at a property.

If you're based in Shepparton and considering a rental property, you're probably weighing up whether the numbers add up, what deposit you'll need, and how much the loan will actually cost you. The structure you choose, the rate you lock in, and the way you manage repayments all affect how much rental income you keep and how quickly you build equity.

How Much Can You Borrow for an Investment Property?

Lenders assess your borrowing capacity for an investment loan using a stricter calculation than they do for owner-occupier lending. They'll take your current income, add a portion of the expected rental income (usually around 80 per cent to allow for vacancies and maintenance), then subtract all your existing debts and living expenses. On top of that, they test your ability to service the loan at a rate roughly 3 percentage points higher than the actual loan rate.

In our experience, buyers in Shepparton often underestimate how much their existing home loan affects what they can borrow for a rental property. If you're earning $120,000 a year and already have a $400,000 mortgage on your own home, a lender might assess your borrowing capacity for a second property at around $250,000 to $300,000, depending on your other commitments. That assumes the rental property will bring in enough income to cover most of its own costs. If the property you're looking at rents for $400 a week, the lender will typically count $320 of that toward your income when they run the numbers.

Variable or Fixed: Which Rate Structure Works for Investors?

Most investors in regional areas choose a variable rate because it offers flexibility to make extra repayments and access any rate cuts without penalty. Fixed rates lock in certainty for a set period, usually between one and five years, but they come with restrictions. If you want to sell the property or refinance during the fixed term, you may face break costs.

A variable rate also means you can offset your savings against the loan balance if your lender offers an offset account on investment loans. Not all do. Some lenders reserve full offset functionality for owner-occupier loans and offer only partial offset or redraw on their investment products. That distinction matters if you plan to park rental income or tax refunds against the loan to reduce interest.

Interest-Only Repayments: When They Make Sense

An interest-only period keeps your monthly repayments lower because you're not paying down the principal. For the first five years, you're only covering the interest charges. That structure appeals to investors who want to maximise cash flow in the early years or who expect capital growth to do the heavy lifting.

Consider a buyer who purchases a unit near the Shepparton Showgrounds for $350,000 with a 20 per cent deposit. The loan amount is $280,000. On a variable rate, an interest-only repayment might sit around $1,400 a month, compared to roughly $1,750 for principal and interest. The difference frees up $350 a month, which can go toward holding costs like body corporate fees, insurance, or building a buffer for repairs. After the interest-only period ends, the loan reverts to principal and interest unless you negotiate an extension, and your repayments jump.

Interest-only loans also mean you're not reducing the debt, so you won't build equity through repayments. Your equity grows only if the property value rises. If the market softens or stays flat, you're left with the same loan balance you started with.

What's Changed for Negative Gearing

Negative gearing lets you deduct your rental property losses against your other income, including your salary. If your interest, rates, insurance, and management fees add up to more than the rent you collect, that shortfall reduces your taxable income.

From the 2027-28 financial year, the rules tighten for established properties purchased after May 2026. Losses on those properties can only be offset against income from other residential properties, not your wage. Losses can still be carried forward and used later, but the immediate tax benefit disappears. Properties purchased before that date, or any new builds purchased after it, keep the old rules. If you bought a rental property in Shepparton before May 2026, or if you're buying a newly constructed home, you can still claim the full loss against your salary.

The grandfathering provisions mean timing matters. Buyers who settled before the cut-off retain full negative gearing for as long as they own that property, even if they refinance or switch lenders.

Deposit Requirements and Lenders Mortgage Insurance

Most lenders want a 20 per cent deposit for an investment loan to avoid charging Lenders Mortgage Insurance. If you're borrowing more than 80 per cent of the property value, LMI gets added to your upfront costs. The premium can range from a few thousand dollars to over $10,000 depending on the loan amount and how far you push the loan-to-value ratio.

Some lenders will go as high as 90 per cent or even 95 per cent LVR if you have a strong income and a clean credit file, but those loans attract higher interest rates and steeper LMI premiums. Borrowing $340,000 to buy a $380,000 property, for example, puts you at roughly 89 per cent LVR. The LMI bill on that loan could exceed $12,000, and you'll likely pay a rate premium of 0.3 to 0.5 percentage points compared to an 80 per cent LVR loan.

If you already own a home in Shepparton and have built up equity, you may be able to use that equity as security instead of saving a separate cash deposit. That approach is common for repeat investors, but it also increases your overall debt and reduces the buffer you have if property values drop. Lenders will still assess your ability to service both loans at the higher test rate.

What You Can Claim Beyond the Interest

Interest is the largest deduction most investors claim, but it's not the only one. Council rates, water charges, landlord insurance, property management fees, and repairs are all claimable in the year you incur them. Depreciation on the building and fixtures adds another layer. If you buy a newer property, the depreciation schedule can return several thousand dollars a year in deductions for the first decade.

Stamp duty and conveyancing costs aren't deductible upfront. They get added to your cost base and reduce the capital gain when you eventually sell. Borrowing costs, including application fees and LMI, can be claimed over five years or over the life of the loan, depending on the amount.

If you're managing the property yourself instead of using an agent, you can't claim a fee for your own time, but you can claim the direct costs of advertising, tenant screening, and any travel related to inspections or maintenance. Keep records. The ATO has been running audits on rental property deductions for several years, and they focus heavily on overclaimed interest, private use, and repairs misclassified as improvements.

How Regional Vacancy Rates Affect Your Loan Serviceability

Lenders adjust the rental income they're willing to recognise based on the vacancy rate in the area. Shepparton's rental market has historically been tight, with vacancy rates often sitting below 2 per cent, but lenders don't always reflect that in their assessments. Most apply a standard 20 per cent shading regardless of the local market, meaning they'll only count 80 per cent of the advertised rent.

That shading affects how much you can borrow. If a property rents for $450 a week, the lender treats it as $360 for serviceability purposes. Over a year, that's a $4,680 difference between the actual income and what the lender credits you with. If you're borrowing close to your limit, that gap can mean the difference between approval and decline.

Using Equity to Fund Your Deposit

If you own your home outright or have paid down a significant portion of the mortgage, you can access that equity to fund the deposit on an investment property without selling or saving. The lender will value your existing property, calculate how much equity you have, and allow you to borrow against it up to a certain limit.

Most lenders cap the combined loan-to-value ratio across all your properties at 80 per cent to avoid LMI, though some will go higher if you're prepared to pay the premium. If your home in Shepparton is worth $500,000 and you owe $200,000, you have $300,000 in equity. The lender will typically let you borrow up to 80 per cent of the home's value, which is $400,000, minus the $200,000 you already owe. That leaves $200,000 available to use as a deposit and cover purchase costs on the investment property.

Releasing equity increases the debt secured against your home, so if the investment property underperforms or you hit financial trouble, both properties are at risk. It also means you're servicing a larger total debt, which reduces your borrowing capacity for any future loans. Equity release works when your income is strong and you have a clear strategy for managing the additional repayments, but it's not a shortcut around affordability.

When Refinancing Makes Sense

Refinancing an investment loan can lower your rate, switch your loan structure, or free up equity for another purchase. Investors typically refinance when their current lender's rate has drifted higher than what's available elsewhere, or when they want to consolidate debt and streamline repayments.

If you've held an investment property for a few years and the value has increased, refinancing lets you access that additional equity without selling. You can use the released funds as a deposit on a second property, fund renovations, or pay down higher-interest debt. The refinance process involves a fresh valuation, a new credit assessment, and discharge fees from your old lender, so it's worth running the numbers to confirm the benefit outweighs the cost.

Some lenders offer rate discounts to attract refinance customers, particularly if you're bringing across a large loan balance or consolidating multiple loans. Those discounts can sit anywhere from 0.1 to 0.4 percentage points below the standard variable rate, depending on your loan size and LVR.

If you're weighing up your options or want to confirm what you'd qualify for, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions