Investment Loan Structures: How to Set Yours Up

The structure you choose when taking out an investment loan determines how much you can borrow next time, what you can claim at tax time, and whether you can tap into equity without refinancing.

We regularly work with property investors in Moorebank who want to purchase another property down the line. The loan structure they select for their first investment property directly impacts whether that second purchase happens in two years or five. Selecting between interest only and principal and interest repayments, deciding on variable or fixed interest rates, and structuring your loan with the right features will either accelerate or constrain your portfolio growth.

Interest Only or Principal and Interest: What Changes Between Them

Interest only loans let you pay just the interest portion each month, keeping your repayments lower and freeing up cashflow. Principal and interest loans require you to pay down the loan amount over time, which reduces the debt but increases your monthly cost.

Consider someone purchasing a townhouse in Moorebank for $650,000 with a 20 percent investor deposit. Under an interest only structure, the monthly repayment might sit around $2,400 at current variable rates. The same loan on principal and interest could push monthly repayments closer to $3,200. That $800 difference each month can either fund another property deposit in a few years or go toward reducing debt on the existing investment.

Investors often prefer interest only during the early years to maximise tax deductions and preserve cashflow, particularly if the rental income from the property doesn't fully cover the loan repayment. Once equity builds and the investor shifts focus from acquiring more properties to reducing debt, switching to principal and interest becomes more relevant. Structuring your investment loan with the flexibility to switch between these repayment types without penalties gives you options as your circumstances change.

Variable Rate, Fixed Rate, or a Split Between the Two

A variable interest rate moves with the market, meaning your repayment can go up or down. A fixed interest rate locks in your repayment for a set period, usually between one and five years. A split rate structure divides the loan between variable and fixed portions.

Moorebank property investors who want certainty often fix a portion of their loan to protect against rate rises while keeping part of the loan variable to access features like offset accounts and extra repayments. Fixing the entire loan removes flexibility, as most fixed rate products don't allow additional repayments beyond a small annual limit and charge break costs if you need to refinance early.

Splitting the loan, say 60 percent variable and 40 percent fixed, means you can still use an offset account on the variable portion while locking in part of your repayment. That variable portion also remains flexible if you decide to refinance or access equity release down the line. The fixed portion provides a buffer if rates climb, but you lose some ability to pay down the loan faster or adjust the structure without cost.

Loan to Value Ratio and How It Affects Borrowing Capacity

Your loan to value ratio measures how much you borrow against the property's value. Borrowing 80 percent or less means you avoid Lenders Mortgage Insurance, which can add thousands to your upfront costs. Borrowing more than 80 percent triggers LMI, and the premium increases as the LVR climbs.

In a scenario where someone purchases a unit in Moorebank for $580,000 with a 15 percent deposit, the LVR sits at 85 percent. That borrower will pay LMI, which could add $15,000 to $20,000 depending on the lender. The same purchase with a 20 percent deposit avoids that cost entirely, leaving more equity available for the next investment.

Lenders also assess your borrowing capacity based on your existing debt and rental income. If the Moorebank property generates $550 per week in rental income, lenders typically assess around 80 percent of that figure to account for vacancy rate and maintenance costs. That gives you roughly $440 per week of income recognised toward your borrowing power. Structuring the loan to keep repayments lower, such as through interest only, means more rental income is available to offset the loan cost in the lender's calculation, which can increase how much you qualify for on the next purchase.

Offset Accounts and Redraw Facilities: Which One Works for Investment Loans

An offset account is a transaction account linked to your loan. The balance in the offset reduces the interest charged on your loan without technically making extra repayments. A redraw facility lets you make extra repayments into the loan and withdraw them later if needed.

Offset accounts work better for investment loans because the loan balance stays high, which means you can claim more interest as a tax deduction. If you pay extra into the loan using a redraw facility, you reduce the loan balance and lower the amount of interest you can claim. That might make sense for an owner-occupied home loan, but it reduces the tax benefits on an investment property loan.

If you're holding funds for your next deposit or covering upcoming expenses, keeping that money in an offset account linked to your investment loan reduces the interest you pay without affecting your ability to maximise tax deductions. The interest saved in the offset is not taxable income, which makes it more valuable than earning interest in a standard savings account where you'd pay tax on the earnings.

Standalone Loan or Cross-Collateralised: What It Means for Your Next Purchase

A standalone loan uses only the investment property as security. A cross-collateralised loan uses multiple properties as security for one loan or loan package. Cross-collateralisation can help you borrow more or avoid LMI, but it ties your properties together, which limits flexibility when you want to sell or refinance.

If you own a home in Moorebank and want to purchase an investment property, using equity from your home as part of the deposit might seem straightforward. Some lenders will cross-collateralise both properties, meaning they hold security over both. If you later want to sell the investment property or refinance just that loan, you'll need the lender's consent and potentially face valuation costs or restructuring fees.

Keeping loans standalone means each property has its own loan, which makes it simpler to sell, refinance, or leverage equity from one property without affecting the other. Structuring your loans this way from the start avoids complications later and gives you more control over each asset in your portfolio.

Structuring for Portfolio Growth: Accessing Equity Without Refinancing

Once your property increases in value, the equity you've built can fund the deposit for another investment. Accessing that equity without refinancing the entire loan saves time and avoids break costs if you're on a fixed rate.

Some lenders allow you to set up a separate loan split secured against the same property, which lets you access equity as a new loan without touching the existing loan structure. If your Moorebank property was purchased for $650,000 and is now valued at $720,000, you might have $70,000 in equity. Accessing 80 percent of that equity without refinancing means you can draw down around $56,000 for your next deposit while keeping your existing loan intact.

This approach works particularly well if you secured a low interest rate or favourable loan features that you don't want to lose. Setting up your loan with this flexibility from the beginning makes accessing equity straightforward when the time comes. Discussing your property investment strategy with your broker during the initial investment loan application ensures the structure supports your plans, not just your immediate purchase.

At KM Financial Service, we work with property investors across Moorebank and surrounding areas who want their loan structure to support long-term portfolio growth. Call one of our team or book an appointment at a time that works for you.

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