Do you know how to optimise your investment loan?

Why investment loan structure matters more than rate alone

Your loan structure determines how much equity you can access for future purchases, how much you pay in interest over time, and how effectively you claim tax deductions. A lower rate on the wrong structure can cost you more than a slightly higher rate on a loan built around your investment strategy.

Consider an investor who purchased a two-bedroom unit in Victoria Park with an 80 per cent LVR loan, split 70 per cent variable and 30 per cent fixed. The variable portion carried an offset account where all rental income was deposited. Over three years, offset savings reduced interest on the variable portion by around $8,000, while the fixed portion provided certainty on serviceability. When the fixed term ended, the investor refinanced that portion to variable, released equity based on capital growth, and used the funds as a deposit on a second property in Canning Vale. The loan structure made that outcome possible without selling the original asset.

Should you use interest-only or principal-and-interest repayments?

Interest-only repayments maximise cash flow and tax deductions in the short term, while principal-and-interest repayments build equity and reduce your loan balance over time. The decision depends on whether you plan to hold the property long-term or reinvest quickly.

Interest-only terms are typically available for five years on residential investment loans, though some lenders offer extensions or longer initial terms depending on the loan amount and your servicing position. At the end of the interest-only period, the loan converts to principal-and-interest unless you apply to extend. Repayments increase at that point, so serviceability needs to be assessed at the higher repayment amount from the start. For investors planning to acquire multiple properties within a few years, keeping repayments lower in the early stage preserves borrowing capacity and keeps surplus income available for additional deposits. For those focused on reducing debt or preparing for retirement, switching to principal-and-interest sooner reduces the total interest paid and builds a buffer against rate rises.

Using offset accounts to manage taxable income

Offset accounts linked to investment loans reduce the interest charged without reducing the deductible loan balance. Funds in the offset account remain accessible and do not attract interest, making them useful for managing cash flow between tenancies or holding funds for future property purchases.

Rental income deposited into an offset account reduces the daily interest calculation on your investment loan, which lowers the total interest you pay over the year. Importantly, the loan balance itself does not change, so your deductible interest expense is based on the full loan amount, not the reduced balance after offset. This approach works well when you expect to use the rental income for another investment purpose soon, such as funding a deposit or covering holding costs on a second property. If rental income is instead deposited into a separate savings account, it may earn interest, but that interest is assessable income and the investment loan continues to accrue interest on the full balance.

Fixed versus variable rates for Victoria Park investors

Variable rates give you flexibility to make extra repayments, redraw funds, and access offset accounts, while fixed rates lock in repayments for a set period and remove exposure to rate rises during that term. Most investors use a split to balance both.

Victoria Park has seen consistent demand from renters due to proximity to the CBD, Curtin University, and the Causeway, which supports stable rental yields even during periods of higher vacancy elsewhere. Investors holding property in areas with strong rental demand may prefer variable rates to take advantage of offset facilities and retain the ability to refinance or release equity as values increase. Those with tighter serviceability or who purchased at higher LVRs may prefer a fixed portion to manage repayment risk, particularly if they plan to hold the property through a full market cycle. A common structure is to fix 30 to 50 per cent of the loan and leave the remainder variable with offset, allowing partial protection from rate movements while retaining flexibility on the majority of the debt.

Structuring loans to preserve equity for portfolio growth

Using separate loan splits or standalone facilities for each property keeps equity quarantined and makes it easier to release funds for future purchases without cross-collateralising your entire portfolio. Cross-collateralisation can reduce flexibility and complicate refinancing if one property underperforms.

When you secure multiple properties under a single facility or allow a lender to hold security over more than one asset for a single loan, releasing equity or selling one property often requires the lender's consent and may trigger a full portfolio revaluation. If one property has declined in value or if your income position has changed, the lender may refuse to release that security, locking you into the existing structure. A cleaner approach is to hold each property under its own loan facility, even if those facilities are with the same lender. This allows you to refinance one property independently, release equity from the asset that has performed well, and use those funds without affecting the financing on your other holdings.

When to refinance an investment loan

Refinancing makes sense when you can reduce your rate by more than 0.30 percentage points, access features your current loan does not offer, or release equity to fund another investment. Rate improvement alone may not justify the cost if you lose offset balances, break a fixed term early, or pay higher ongoing fees.

Many lenders offer retention rates or discounts to existing customers who threaten to leave, particularly if your LVR has improved or if you have a strong repayment history. Before committing to a refinance, check whether your current lender will match or beat an external offer. If you are releasing equity at the same time, compare the blended rate across both the existing and new loan amounts, not just the rate on the top-up portion. Some lenders charge a higher rate on equity release or apply a different LVR threshold to the released funds, which can offset the benefit of switching. Refinancing also resets your loan term unless you specify otherwise, so a 25-year loan that has been running for five years will restart as a 30-year loan if you do not instruct the new lender to maintain the remaining term.

Maximising deductions without overclaiming

Interest on an investment loan is deductible only to the extent the borrowed funds are used to purchase or hold an income-producing asset. If you redraw funds from an investment loan and use them for private purposes, the interest on that redrawn portion is not deductible, even though the loan is secured against an investment property.

This is a common mistake during renovations or when investors use redraw to fund personal expenses. The ATO applies a purpose test to determine deductibility, so keeping investment and personal borrowings separate is critical. If you need to access equity for a private purpose, consider securing a separate loan against the investment property rather than redrawing from the original facility. Similarly, if you convert an investment property to your primary residence, interest deductions stop from the date of conversion, even if the loan remains in place. Borrowing costs such as application fees, valuation fees, and LMI premiums paid on an investment loan are deductible over five years or the loan term, whichever is shorter, unless the total amount is less than $100, in which case it can be claimed in full in the first year.

Loan features that support long-term strategy

Portability, redraw, extra repayment options, and the ability to add further advances without reapplying all contribute to a loan's usefulness over a ten- or twenty-year hold period. A loan that offers flexibility now may save you from refinancing multiple times as your strategy evolves.

Portability allows you to transfer the loan to a different security without discharging and reapplying, which is useful if you sell the original property and purchase another within a short window. Redraw allows you to access any extra repayments you have made above the minimum, though as noted earlier, the deductibility of interest on redrawn funds depends on how those funds are used. Some lenders allow you to apply for further advances against existing security without submitting a full application, which can speed up the process if you need to access equity quickly. For Victoria Park investors who plan to build a portfolio across the inner suburbs, choosing a lender with strong appetite for multiple securities and flexible advance terms can reduce friction as the portfolio grows.

Call one of our team or book an appointment at a time that works for you. We work with Victoria Park investors to structure investment loans that align with your property and tax strategy, and we'll help you compare options across lenders to find the features and rates that support your goals.

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