What Are Investment Loans and How to Fund Your Rental

An investment loan is finance used to buy property you'll rent out to generate income. The deposit, interest structure and borrowing calculations differ from an owner-occupied home loan, and the recent federal tax changes mean you need to know whether the property you're considering counts as a new build.

What Deposit Do You Need for a Rental Property

Most lenders ask for a 20 per cent deposit to avoid paying Lenders Mortgage Insurance on an investment property. You can borrow with 10 per cent in some cases, but LMI on an investor loan is typically higher than on an owner-occupied loan, and not all lenders will accept a deposit below 20 per cent for rental purchases.

Deposit source matters. Genuine savings, equity from another property, or a family guarantee are accepted by most lenders. Consider a buyer who's been renting in Merrylands and saving steadily while house prices in the suburb have climbed. They've built up savings, but releasing equity from a parent's home in Guildford allows them to hold those savings back for buffer and settlement. The lender calculates the loan using the value of the Merrylands unit plus LMI, the parent property provides the security shortfall, and the buyer keeps liquidity for the first few months of ownership. That structure works because the family guarantee is limited, the rental income supports most of the repayment, and the buyer has a clear exit plan to refinance and release the parent once equity grows.

Interest Only or Principal and Interest

Interest-only repayments keep monthly outgoings lower, which can help if your rental income doesn't cover the full loan cost. Principal and interest means you're paying the loan down, but the repayment is higher and the upfront interest deduction is slightly smaller because part of each payment reduces the principal.

Interest-only is typically available for five years at a time on an investment loan. After that term, the loan reverts to principal and interest unless you apply to extend. Not all lenders will extend, and they'll reassess your income and the property's rental yield when you ask. If you're relying on passive income to build wealth without selling, paying down principal from the start gives you more control. If your strategy depends on leverage and portfolio growth, interest-only frees up cash flow for the next deposit.

Merrylands has a reasonable rental pool because of its proximity to Parramatta and access to the T2 train line at Merrylands station. A two-bedroom unit in a block near Stockland Merrylands might rent for around $480 per week. At that rate, an interest-only loan at current variable rates will still leave you with a monthly shortfall unless your deposit is above 30 per cent or you've negotiated a rate discount. That shortfall is where the tax treatment comes in.

Negative Gearing and the July 2027 Tax Rule Change

Negative gearing means your interest and other claimable expenses exceed your rental income, and you offset that loss against your salary or other assessable income. From 1 July 2027, rental losses on established properties bought after 7:30pm on 12 May 2026 can only be offset against other residential rental income or carried forward. You can't claim them against wages.

Properties bought before that cut-off, or purchased between May 2026 and June 2027, retain the existing negative gearing rules until sold. New residential dwellings built on previously vacant land, or properties where the number of dwellings increases, remain fully negatively geared even after July 2027. A knock-down rebuild that results in the same number of dwellings doesn't qualify.

If you're looking at an older unit in Merrylands, the quarantine rule will apply from mid-2027. You'll still be able to claim interest and expenses, but only against rental income from that property or other rentals you own. If you're earning a salary and buying your first rental, that changes the after-tax holding cost. If you're buying a newly built townhouse as part of a subdivision, the existing rules continue.

How Lenders Calculate Borrowing for Rental Property

Lenders add 80 per cent of the forecast rental income to your salary, then apply the serviceability buffer. APRA requires lenders to test repayments at three percentage points above the actual rate. If the property is vacant for part of the year, your income drops but the loan repayment doesn't, so lenders assume a vacancy rate by shading the rental figure.

Debt-to-income limits also apply. Since February 2026, lenders can only write 20 per cent of new investor loans at a DTI of six times income or more. That cap is separate from the owner-occupied cap, but it still means high-income borrowers can't stretch as far as they could before the change. If your salary is $90,000 and you're proposing a loan of $600,000, you're over six times and the lender needs to fit you inside their quota or decline.

Rental income from the property you're buying helps, but only partially. A property generating $25,000 a year in rent is assessed at $20,000, and that's added to your employment income before the DTI ratio is calculated. The effect is that rental yield matters more now than it did two years ago. A high-yield unit in Merrylands will support a larger loan than a low-yield house in a suburb with slower rental growth, even if the purchase price is the same.

Variable or Fixed Rate Investment Loans

Variable rate investment loans come with offset and redraw in most cases, and you can make extra repayments without penalty. Fixed rate investment loans lock your rate for one to five years, but you lose flexibility. Most fixed investment loans don't offer offset, and break costs apply if you refinance or sell before the fixed term ends.

If you're confident you'll hold the property and don't plan to access equity or refinance in the next few years, fixing part of the loan caps your interest cost. If your strategy involves building equity and recycling it into another purchase, variable keeps your options open. Many investors split the loan, fixing half for certainty and leaving half variable for access. You can read more about the mechanics of different loan structures on the investment loans page.

Capital Gains Tax and Indexation from July 2027

The 50 per cent CGT discount for investment properties is replaced with cost base indexation and a 30 per cent minimum tax rate on real gains for properties acquired after the May 2026 cut-off. Gains that accrued before 1 July 2027 on properties you already own are still discounted under the old rule. New builds retain an election between discount and indexation.

Indexation adjusts your original purchase cost by CPI, so the taxable gain is smaller in real terms. The 30 per cent minimum rate applies to that indexed gain. For most investors, the outcome depends on how long you hold the property, what inflation does, and your marginal tax rate at sale. If you're in a lower tax bracket when you sell, indexation with a 30 per cent floor might cost more than the current discount. If you're in the top bracket and hold for a long period, indexation might deliver a lower tax bill.

The rules don't push you toward or away from property investment on their own. They do mean you need to model the holding cost and exit tax before you sign a contract, and they favour new builds over established stock if your time horizon is long. If you're comparing an older unit and a newly completed townhouse in Merrylands, the difference in both negative gearing access and CGT treatment over a ten-year hold could be tens of thousands of dollars.

Accessing Equity to Fund the Next Purchase

Once your property increases in value, you can refinance and release equity without selling. Lenders will typically lend up to 80 per cent of the new valuation across all your secured debt. If you bought a unit for $600,000 with a $480,000 loan, and it's now worth $680,000, you could borrow up to $544,000 in total. That's $64,000 in available equity, minus refinance costs.

That equity can be used as a deposit for the next property. The original loan increases, the rental income on the first property stays the same, and your borrowing capacity is tested again using both rental incomes and your salary. Leveraging equity is how portfolios grow, but it also means you're carrying more debt and more exposure to vacancy and rate movements. If rental income falls or rates rise sharply, the serviceability buffer tightens and further borrowing becomes harder. You can explore equity release scenarios in more detail through a refinancing review.

Loan Features and Rate Discounts

Rate discounts on investor loans are smaller than on owner-occupied loans, but they're still negotiable. A 0.3 per cent discount over the standard variable rate can reduce your annual interest bill by several thousand dollars on a loan above $500,000. Lenders offer deeper discounts if you're borrowing more, hold other products with them, or work in certain professions.

Offset accounts are less common on investor loans than on owner-occupied loans, and some lenders charge a higher rate if you want offset on a variable investment loan. If you're holding cash for repairs, buffer or the next deposit, offset saves you tax because you're reducing interest rather than earning assessable income on a savings account. If the lender charges 0.15 per cent more for offset, calculate how much cash you'll realistically hold in the account and whether the interest saving justifies the higher rate.

Redraw is available on most variable investment loans, but the funds aren't as liquid as offset. If you redraw to use for private purposes, the interest on that redrawn portion is no longer deductible. Keeping investment and private funds separate avoids complications at tax time and makes your deductions clear.

What Lenders Look for in the Property Itself

Lenders value the security, not just your income. A unit in a block with high owner-occupier rates and low strata arrears is easier to finance than a block with deferred maintenance or a large sinking fund deficit. Lenders will ask for a strata report if you're buying into a scheme, and they'll reduce the loan amount or decline if the body corporate finances are poor.

Merrylands has a mix of older low-rise units and newer developments near the town centre. If you're buying an older unit, check whether any major works are planned and whether levies have been increasing. A building with scheduled facade work or lift replacement might have a special levy approved, and that affects both your holding cost and the lender's willingness to settle. If you're buying new or near-new, check the builder's defect liability period and whether the owners corporation has made any claims. Lenders will lend against both old and new stock, but the strata health matters more than the age of the building.

Zoning and dwelling type also matter. A lender won't finance a boarding house or serviced apartment on a standard investment loan. If the property is tenanted at settlement, the lender will want evidence that the lease is current and that the rent matches their valuation estimate. If the property is vacant, they'll use a rental appraisal, and you'll need to prove rental income once a tenant is in place if the lender has made serviceability conditional on it.

Call one of our team or book an appointment at a time that works for you through the book appointment page. We'll walk through your deposit, income and property type, show you what loan amount and structure fits, and help you understand how the July 2027 rule changes affect your specific situation.

Frequently Asked Questions