Comparing investment loans isn't about finding the lowest rate on a comparison website.
It's about matching loan features to your investment strategy, understanding how lenders assess rental income, and structuring your borrowing so it supports rather than limits your next property purchase. The difference between a well-structured investment loan and one that merely ticks the box can be tens of thousands of dollars over the life of the loan, and more importantly, whether you can access equity when opportunity knocks.
How Lenders Assess Rental Income Changes Everything
Lenders typically factor in 70% to 80% of your expected rental income when calculating your borrowing capacity for an investment loan. This percentage varies between lenders and represents their buffer against vacancy periods and unexpected costs.
Consider a buyer purchasing a two-bedroom unit in Scarborough with projected rental income of $600 per week. One lender might assess this at 80%, crediting $24,960 annually toward serviceability. Another might apply 70%, crediting only $21,840. That $3,120 difference might sound minor until you realise it can reduce your borrowing capacity by roughly $30,000 or determine whether you qualify for the loan amount you need.
The rental assessment percentage matters even more when you're looking to build a property portfolio. In our experience, investors who choose lenders with higher rental income assessments and no restrictions on the number of investment properties they'll fund have far more flexibility when acquiring their second or third property.
Interest Only vs Principal and Interest: The Cash Flow Decision
Interest only investment loans let you pay only the interest portion for an agreed period, typically one to five years. Principal and interest loans require you to pay down the loan balance from day one.
The decision usually comes down to cash flow and tax strategy. An interest only loan on a $600,000 investment property at current variable rates might cost around $2,500 per month in repayments. The same loan on principal and interest could cost closer to $3,400 monthly. That $900 monthly difference matters when rental income is $2,600 and you're covering body corporate fees, insurance, and setting aside for maintenance.
Interest only structures also preserve deductible debt. When you pay down principal on an investment loan, you're reducing the amount of debt generating tax deductions. If you later need to access equity for personal use, that new borrowing isn't tax deductible. Keeping investment debt high and personal debt low usually makes more sense from a tax perspective.
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Variable Rate vs Fixed Rate for Investment Properties
Variable rate investment loans typically come with offset accounts and unlimited additional repayments. Fixed rate products lock in your interest rate but usually remove these features.
For property investors, the offset account is particularly valuable. Money sitting in an offset account linked to your investment loan reduces the interest you pay without reducing the loan balance itself. Your entire loan remains tax deductible, but you're only paying interest on the reduced amount.
As an example, an investor with a $500,000 investment loan and $80,000 in an offset account only pays interest on $420,000. If that loan is structured as principal and interest, their repayments still chip away at the full loan balance, preserving the tax deduction. This flexibility becomes crucial when managing cash flow across multiple properties or building funds for your next deposit.
Some investors split their loan between variable and fixed portions to balance rate certainty with flexibility, though this adds complexity when refinancing or restructuring later.
Loan to Value Ratio and Lenders Mortgage Insurance
Your loan to value ratio determines whether you'll pay Lenders Mortgage Insurance and affects your interest rate. Borrow more than 80% of the property value and LMI applies. On a $700,000 investment property with a 10% deposit, LMI could add $20,000 to $30,000 to your upfront costs.
Some investors choose to pay LMI to preserve cash for other purposes or to move faster on an opportunity. The premium is usually capitalised into the loan amount and the cost is tax deductible, spread over five years or the loan term, whichever is shorter.
Lenders also tier their interest rates by LVR. The same lender might offer one rate for loans up to 70% LVR, a slightly higher rate for 70% to 80%, and another increment for loans requiring LMI. When comparing investment loan options, check the rate that applies to your specific deposit size, not just the advertised headline rate.
Features That Support Portfolio Growth
Certain loan features become important when you're planning to acquire more than one investment property. Portable loans let you transfer your existing loan to a new security if you sell and buy another investment property, avoiding discharge and application fees. Splitting your loan into multiple accounts can help when you want to sell one property but retain others in your portfolio.
Your borrowing capacity for future purchases depends partly on how your existing investment loans are structured. Lenders reassess your serviceability each time you apply for new borrowing. If your first investment property is on a high rate with a lender who assesses rental income conservatively, you might struggle to qualify for your second purchase even if both properties are positively geared on paper.
We regularly see investors in suburbs like Hillarys and Mindarie who locked themselves into inflexible loan structures on their first purchase, then discovered they couldn't access equity or qualify for additional borrowing when property values increased. The loan worked fine in isolation but didn't support growth.
How Rate Discounts Actually Work
Advertised interest rates for investment loans are usually higher than the lender's standard variable rate for owner-occupiers, then discounted based on your loan amount and LVR. A lender might advertise a 1.00% discount for investment loans over $500,000 at less than 70% LVR, but only 0.70% for loans between $250,000 and $500,000.
This tiering means refinancing to access equity can sometimes trigger a rate increase if it pushes your LVR above a threshold, even though your property value has increased. Understanding how your specific lender structures their rate discounts helps you time equity release and refinancing decisions more strategically.
Some lenders also offer larger discounts for interest only investment loans compared to principal and interest, contrary to what you might expect. Others do the opposite. Comparing investment loan products means looking at the actual rate you'll pay based on your loan amount, LVR, and repayment structure, not the headline discount.
Property Type and Location Influence Approval
Not all lenders will fund all investment property types. Apartments above 30 levels, properties in certain postcodes, or units with specific commercial uses might be restricted or attract higher rates. In Western Australia, some lenders reduce their standard loan to value ratio for apartments or apply additional servicing buffers.
If you're looking at a studio apartment in Scarborough or a townhouse in Karrinyup, checking which lenders will fund that specific property type at your required LVR should happen before you make an offer. Getting pre-approval based on a house, then trying to switch to an apartment purchase, can expose serviceability issues you didn't anticipate.
Western Australia's property market also means some interstate lenders apply different credit policies here compared to the eastern states. Knowing which lenders are actively writing investment loans in WA and what their appetite is for different suburbs and property types saves time during the application process.
The right investment loan comparison accounts for your property investment strategy, your timeline for acquiring additional properties, how you want to manage cash flow, and which loan features support those goals. Rates matter, but structure and lender policy determine whether your borrowing helps or hinders what comes next.
Call one of our team or book an appointment at a time that works for you to discuss which investment loan structure and lender make sense for your specific property and goals.
Frequently Asked Questions
How much rental income do lenders use when assessing investment loan applications?
Lenders typically factor in 70% to 80% of projected rental income when calculating borrowing capacity for investment loans. The exact percentage varies between lenders and represents their buffer against vacancy and unexpected costs.
Should I choose interest only or principal and interest for an investment property loan?
Interest only loans reduce monthly repayments and preserve tax deductible debt, which helps cash flow and tax planning. Principal and interest loans build equity faster but reduce your deductible debt as you pay down the balance.
What is Lenders Mortgage Insurance and when does it apply to investment loans?
LMI applies when you borrow more than 80% of the property value. On investment properties, the premium typically ranges from $20,000 to $30,000 on a $700,000 property with a 10% deposit, though it's tax deductible over five years or the loan term.
Why do interest rates differ between lenders for the same investment property?
Lenders tier their rates based on loan amount, loan to value ratio, property type, and location. They also offer different rate discounts depending on whether you choose interest only or principal and interest repayments.
Can loan structure affect my ability to buy a second investment property?
Yes, how your first investment loan is structured affects future borrowing capacity. Lenders who assess rental income conservatively or charge higher rates can limit your serviceability when applying for additional properties, even if your first property performs well.
