Smart ways to structure your investment loan

Investment loan structure determines cashflow, tax outcomes, and portfolio scalability in ways that become difficult to reverse once settlement has occurred.

A barrister acquiring a two-bedroom apartment for rental income needs to decide whether interest-only or principal-and-interest repayments make sense, whether to fix the rate or leave it variable, and whether to bundle the loan with existing debt or keep it separate. Each choice locks in a financial position that affects deductibility, serviceability for the next purchase, and portfolio refinancing options down the line.

Interest-Only or Principal-and-Interest Repayments

Interest-only repayments reduce monthly outgoings and preserve cashflow, while principal-and-interest repayments build equity and lower the debt balance over time.

Consider a solicitor purchasing an investment property with a loan amount of $600,000. On an interest-only structure, monthly repayments cover only the interest charge, leaving the principal unchanged. On principal-and-interest, each repayment reduces the loan balance, which lowers the deductible interest expense over time but increases equity in the property. For investors holding property acquired after 12 May 2026, losses on that property can only be offset against other residential property income from the 2027-28 income year, so the benefit of maximising deductible interest depends on whether you have offsetting rental income or capital gains from other properties. Interest-only periods typically run for one to five years, after which the loan reverts to principal-and-interest unless renewed.

An interest-only loan structure suits investors prioritising cashflow for additional acquisitions or those expecting capital growth to outpace the benefit of paying down debt. Principal-and-interest suits those focused on reducing leverage over time or planning to hold the property into retirement when income may fall.

Variable, Fixed, or Split Rate Structures

Variable rates move with market conditions, while fixed rates lock in a known repayment for a set term, usually one to five years.

A corporate lawyer refinancing an investment loan at current variable rates retains flexibility to make extra repayments, redraw funds, or refinance without penalty. A fixed rate removes rate risk during the fixed term but typically includes restrictions on additional repayments and attracts break costs if the loan is refinanced or paid out early. Split rate structures combine both: part of the loan is fixed for certainty, part remains variable for flexibility. The split ratio is negotiable, with common structures running 50/50 or 70/30 fixed to variable.

In our experience, fixed rates appeal to investors managing tight cashflow or servicing multiple loans where rate movement creates budget risk. Variable rates suit those expecting to adjust loan size, draw on equity release, or refinance within a short window. Under APRA's Prudential Standard APS 112, investor loans attract higher risk weights than owner-occupied loans, which flows through to pricing. Rate discounts vary by lender, loan size, and loan-to-value ratio.

Standalone Loan or Cross-Collateralised Structure

A standalone loan is secured against a single property, while a cross-collateralised structure uses multiple properties as security for one or more loans.

A litigation lawyer who owns an apartment in Potts Point and acquires a townhouse in Newtown can structure the loans separately, with each property securing only its own debt, or cross-collateralise, where both properties secure both loans. Standalone structures allow each property to be sold or refinanced independently. Cross-collateralisation may reduce documentation and legal costs at the outset and can improve serviceability by pooling equity, but it requires lender consent to sell or refinance any property in the bundle, which adds delay and removes flexibility if market conditions or personal circumstances change.

When expanding your property portfolio, standalone structures preserve optionality. Cross-collateralisation makes sense where serviceability is marginal and consolidation improves approval prospects, but the trade-off is reduced control over individual assets.

Separate Loan Accounts for Each Property

Each investment property should be funded by a separate loan account, even if multiple loans are held with the same lender.

A family lawyer acquiring two properties in the same settlement period should establish two loan accounts rather than a single loan split across both purchases. Separate accounts preserve a clear audit trail between borrowed funds and the specific property those funds were used to acquire. Interest on borrowings is deductible only to the extent the funds are used to produce assessable income. If loan accounts are blended or funds are redrawn for private purposes, the deductible portion becomes harder to substantiate, particularly during an ATO review. Under the Income Tax Assessment Act 1997, the purpose of the borrowing determines deductibility, not the security provided.

Where funds are drawn from offset or redraw to fund renovations, deposits, or other investment costs, those drawings should be tracked to a separate loan split or sub-account to maintain the link between borrowed funds and income-producing use.

Offset Accounts and Loan Structure

Offset accounts reduce the interest charged on a loan by offsetting the account balance against the outstanding loan balance, but they do not reduce the loan amount for loan-to-value ratio purposes under APS 112.

A compliance officer holding an investment loan with a $50,000 offset balance pays interest only on the net loan balance, which reduces the deductible interest expense. For an investment loan, this is typically undesirable. Offset accounts make sense for owner-occupied loans where interest is not deductible, but for investment loans, funds are usually held elsewhere or deployed into additional acquisitions rather than sitting idle in an offset reducing deductible interest.

If an offset account is attached to an investment loan, consider whether those funds should instead be directed to an offset account linked to non-deductible debt, such as a principal place of residence loan, or retained for deployment into the next acquisition. This is the core principle behind debt recycling, where non-deductible debt is progressively converted into deductible investment debt.

Loan-to-Value Ratio and Lenders Mortgage Insurance

Loan-to-value ratio is the loan amount expressed as a percentage of the property's value and determines whether Lenders Mortgage Insurance is required.

LVR above 80 per cent generally triggers LMI, which is a one-off premium paid by the borrower to insure the lender against loss if the borrower defaults. For legal professionals, some lenders offer LMI waivers or reduced premiums at LVRs up to 90 per cent, depending on occupation, income level, and loan purpose. LMI is not refundable and does not protect the borrower. It is calculated on the loan amount and LVR and may be capitalised into the loan or paid upfront. Stamp duty may apply to the LMI premium depending on the state or territory.

From a portfolio growth perspective, paying LMI to access a higher LVR may be viable if the cost is outweighed by the capital growth or rental income from acquiring the property sooner, but it should be weighed against the impact on serviceability for subsequent purchases. APRA's debt-to-income limit, effective from 1 February 2026, restricts lending above six times gross income to 20 per cent of new investor loans at each ADI, which adds a secondary constraint on high-LVR borrowing.

Portfolio Refinancing and Loan Structure

Portfolio refinancing involves consolidating or restructuring multiple investment loans, typically to access equity, improve rates, or change loan features.

A personal injury lawyer holding three investment properties with loans across two lenders might refinance all loans to a single lender to access lower interest rates or to release equity for a fourth acquisition. Investment loan refinancing resets the loan structure, so it is an opportunity to correct earlier decisions such as cross-collateralisation, convert to interest-only, or split fixed and variable portions. Refinancing triggers a new serviceability assessment under current APRA requirements, including the 3.0 percentage point buffer and DTI limit, and may incur discharge fees, application fees, valuation costs, and legal fees.

If any loan in the portfolio is on a fixed rate, refinancing that loan before the fixed term expires will trigger break costs, which can be substantial if rates have fallen since the loan was fixed. The calculation is based on the difference between the fixed rate and the wholesale funding rate for the remaining fixed period, multiplied by the outstanding loan balance.

Long-Term Interest-Only Loans and APS 112 Classification

Long-term interest-only loans with an LVR above 80 per cent and an interest-only period exceeding five years are classified as non-standard loans under APS 112, which increases the lender's capital cost and reduces availability.

Most lenders cap interest-only periods at five years for investor loans above 80 per cent LVR to avoid the non-standard classification. For loans at or below 80 per cent LVR, interest-only periods of up to 10 years are sometimes available, depending on the lender's policy and the borrower's profile. Repeated renewals of interest-only periods are possible but require re-approval and may be subject to tightening policy or rate adjustments at each renewal.

Call one of our team or book an appointment at a time that works for you to review your current loan structure or discuss how to set up finance for your next investment property acquisition.

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