Top tips to structure an investment loan for rentvesting

What is rentvesting and why does it require specific loan structuring

Rentvesting is a property acquisition strategy whereby an individual purchases an investment property in one location while continuing to rent their own residence elsewhere. This approach requires an investment loan, not an owner-occupier loan, as the purchased property will generate rental income rather than serve as the borrower's principal place of residence. The loan structure must comply with prudential requirements applied by authorised deposit-taking institutions and align with taxation obligations under the Income Tax Assessment Act 1997 (Cth).

For ACT residents, rentvesting often involves purchasing property in a more affordable regional market while renting closer to employment hubs in Canberra, Belconnen or Tuggeranong. The borrower remains a tenant in their current location but holds the investment property with the intention of generating rental income and capital growth.

The distinction between owner-occupier and investment loan classifications is not discretionary. Where any doubt exists about occupancy intention, prudential standards require the loan to be classified as an investment loan. This classification attracts different interest rate pricing, higher capital risk weightings under Prudential Standard APS 112, and in most cases a lower maximum loan-to-value ratio than would apply to an equivalent owner-occupier application.

Investment loan amount and deposit requirements under current prudential settings

Most lenders require a minimum deposit of 20 per cent of the purchase price for an investment property loan to avoid Lenders Mortgage Insurance. Where the loan-to-value ratio exceeds 80 per cent, LMI is generally required. The premium is calculated on a sliding scale and is payable by the borrower, with stamp duty on the premium also applicable in some jurisdictions.

Under Prudential Standard APS 112, investment loans attract higher risk-weighted asset charges than owner-occupier loans at the same LVR. This increased capital cost flows through to investor interest rates, which typically sit 30 to 60 basis points above equivalent owner-occupier rates. Lenders also apply a serviceability buffer of at least 3.0 percentage points above the loan product rate when assessing capacity to service the debt. Rental income from the investment property is included in serviceability calculations, though lenders apply a discount factor, commonly 80 per cent of the expected rent, to account for periods of vacancy and non-payment.

Since 1 February 2026, a debt-to-income lending limit has applied to all authorised deposit-taking institutions. Each institution may lend up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. This limit applies separately to the investor portfolio and does not affect existing loans. Applicants whose total debt, including the proposed investment loan, exceeds six times their gross annual income may find their options limited to lenders with capacity remaining under the quarterly allocation.

Fixed rate or variable rate loan products for investment purposes

Investment loan products are available in variable rate, fixed rate, and split rate structures. Variable rate loans allow the interest rate to move in line with the lender's standard variable rate for investor loans, which adjusts in response to changes in the Reserve Bank cash rate and funding costs. Fixed rate loans lock the interest rate for a specified term, typically one to five years, providing certainty over repayment amounts during the fixed period.

A split rate structure divides the loan amount between a fixed portion and a variable portion. This structure is used where the borrower seeks partial rate certainty while retaining access to offset account facilities and additional repayment flexibility on the variable portion. Offset accounts are generally not available on the fixed portion of a loan, and additional repayments on a fixed loan may incur break costs if the loan is discharged or refinanced before the fixed term expires.

Consider a scenario where a borrower establishes an investment loan with a split structure, fixing 50 per cent of the loan for three years and leaving the remainder on a variable rate with a linked offset account. Rental income is directed into the offset account, reducing interest payable on the variable portion while the fixed portion provides protection against rate increases during the initial holding period. At the end of the fixed term, the borrower may elect to refix, switch to variable, or refinance depending on prevailing rates and their financial position at that time.

Interest-only repayment structures and their tax treatment

Investment loans are commonly structured with an interest-only repayment period, typically five years, during which the borrower pays only the interest component and the principal balance remains unchanged. At the end of the interest-only term, the loan reverts to principal and interest repayments unless an extension is negotiated or the loan is refinanced.

Interest-only repayments reduce the monthly cash outflow, which can improve cash flow where rental income does not fully cover loan repayments, council rates, insurance, and other holding costs. Under the Income Tax Assessment Act 1997 (Cth), interest on borrowings used to acquire or hold a residential rental property is deductible against assessable income to the extent the property is rented or held to produce assessable income. Principal repayments are not deductible. An interest-only structure therefore maximises the proportion of each repayment that is claimable as a deduction.

For properties acquired after 7:30pm AEST on 12 May 2026, rental losses, including interest deductions that exceed rental income, are deductible only against other income from residential properties from the 2027-28 income year onward. Losses can be carried forward to offset residential property income in future years. Properties held at 12 May 2026, or acquired under a contract entered into before that time, continue to allow full deductibility of losses against salary and wages income. Eligible new builds also retain full negative gearing treatment regardless of acquisition date.

Under Prudential Standard APS 112, a long-term interest-only residential loan is classified as non-standard where the LVR exceeds 80 per cent and the contractual interest-only period is greater than five years or not specified. Non-standard classification attracts higher capital charges for the lender, which may affect pricing or approval.

Negative gearing benefits and the changed deductibility rules from the 2027-28 income year

Negative gearing refers to the tax treatment of losses arising where deductible expenses, including interest, exceed rental income. For properties held at 7:30pm AEST on 12 May 2026 or acquired under a contract entered into before that time, losses remain fully deductible against all income, including salary and wages, indefinitely. For properties acquired after that date, losses are deductible only against residential property income from the 2027-28 income year onward, unless the property is an eligible new build.

An eligible new build includes a dwelling constructed on previously vacant land and dwellings that replace existing properties where the number of dwellings increases. A knock-down rebuild that does not increase the dwelling count is not eligible. A new build occupied for more than 12 months before being sold to a subsequent investor loses its new build status for the subsequent purchaser, meaning losses for that purchaser are subject to the restricted deductibility rule.

In the ACT, where stamp duty concessions and eligibility for schemes such as the Home Buyer Concession Scheme have historically favoured new or substantially renovated properties, some investors have pursued new build investment as part of a rentvesting strategy. From a taxation perspective, new builds acquired after 12 May 2026 retain the ability to offset losses against all income, which may influence product selection for borrowers who anticipate a period of negative cash flow in the early years of ownership.

For a borrower acquiring an established unit in Civic or an established townhouse in Gungahlin after 12 May 2026, rental losses are quarantined from salary income from the 2027-28 income year. Where the borrower holds multiple residential investment properties, losses and income across those properties are aggregated, and only the net loss is quarantined. Capital gains realised on the sale of residential property can also be offset by accumulated quarantined losses.

Capital gains tax treatment for investment properties acquired before and after 1 July 2027

For capital gains accruing before 1 July 2027, the 50 per cent CGT discount continues to apply to residential investment properties held for more than 12 months by individuals, trusts and partnerships. From 1 July 2027, the 50 per cent discount is replaced by cost base indexation and a 30 per cent minimum tax rate on real capital gains accruing from that date. Investors index the cost base of the asset in line with inflation and pay tax on above-inflation gains only.

For an investment property owned before 1 July 2027 and sold after that date, gains accruing before 1 July 2027 are taxed under the existing 50 per cent discount rules, and gains accruing after that date are taxed under the indexed cost base and minimum rate rules. The taxpayer may obtain a market valuation as at 1 July 2027 or apply an apportionment formula published by the Australian Taxation Office.

For eligible new build residential properties, both the existing 50 per cent discount and the new indexed cost base with 30 per cent minimum rate are available as a choice at the time of disposal. The minimum rate applies only where the taxpayer's effective rate on the indexed gain is below 30 per cent, and recipients of certain government payments, including the Age Pension and JobSeeker, are exempt from the minimum rate in the year they receive such a payment.

The changed CGT treatment does not alter the taxation position for owner-occupiers selling their principal place of residence, as the main residence exemption remains in place. For renters holding an investment property under a rentvesting strategy, the investment property does not qualify for the main residence exemption, and the full capital gain is assessable subject to the discount or indexation rules applicable at the time of disposal.

Structuring for refinance and portfolio growth under debt-to-income limits

Investment loan structuring should account for the potential to refinance or expand the property portfolio over time. Since 1 February 2026, lenders have been subject to a limit whereby no more than 20 per cent of new investor loans in any quarter may be made to borrowers with a debt-to-income ratio of six times or greater. This limit applies at the institution level and is measured separately for investor and owner-occupier portfolios.

A borrower seeking to add a second investment property, or to refinance an existing investment loan while also increasing the loan amount to fund further investment, may be affected by this limit where their total debt approaches or exceeds six times their gross annual income. The limit applies to new lending only and does not affect existing loans, but it may constrain access to certain lenders at certain points in the quarterly cycle.

Loan structures that preserve equity and maintain a manageable debt-to-income ratio provide greater flexibility for future borrowing. Where a borrower intends to acquire multiple properties over time, the initial loan structure should avoid over-leveraging, particularly where rental income alone does not service the debt and the borrower is relying on salary income to meet serviceability requirements.

For borrowers with an existing home loan secured against an owner-occupied property, leveraging equity in that property to fund the deposit on an investment property is a common approach. The borrowing is split into two facilities: the original home loan, which remains classified as owner-occupier, and a new investment loan for the deposit and purchase costs. Interest on the investment facility is deductible, while interest on the owner-occupier loan is not. Mixing the two purposes within a single loan facility can compromise the deductibility of interest, and careful structuring is required to maintain separation for taxation purposes.

Holding costs, claimable expenses and the role of offset accounts in cash flow management

Ongoing holding costs for an investment property include council rates, water and sewerage charges, building insurance, landlord insurance, property management fees, repairs and maintenance, and depreciation on plant and equipment and building structure where applicable. Body corporate fees are also deductible where the property is part of a strata title scheme. All of these expenses are deductible to the extent the property is rented or genuinely available for rent.

Rental income must be declared as assessable income. Lenders typically assess rental income at 80 per cent of the expected market rent to account for vacancy periods and non-payment. The Australian Taxation Office does not apply a discount to rental income for tax purposes, but deductions for periods when the property is vacant are allowable provided the property is genuinely available for rent during that period.

An offset account linked to the variable portion of an investment loan allows the borrower to deposit surplus funds, including rental income, to reduce the interest charged without making a principal repayment. The interest saving from an offset balance is not assessable income, and the offset balance remains accessible. Where rental income fluctuates or the borrower anticipates a future need for liquidity, an offset account provides a mechanism to reduce interest costs while retaining flexibility.

Offset account balances do not reduce the loan amount for the purpose of calculating the loan-to-value ratio under Prudential Standard APS 112, and lenders do not reduce the outstanding loan balance by the offset amount when assessing equity for refinancing or further borrowing.

Application process and documentation requirements for investment loan approval

The application process for an investment loan requires evidence of income, existing liabilities, savings history, and details of the property to be purchased. Lenders assess borrowing capacity by calculating net income after tax, deducting existing committed liabilities, applying the serviceability buffer, and adding 80 per cent of the expected rental income for the investment property.

Where the applicant is acquiring an off-the-plan property or a property not yet constructed, lenders may require a copy of the contract of sale, the developer's financial position, and evidence of progress toward completion. Settlement does not occur until construction is complete and a certificate of occupancy is issued, and the loan approval must remain valid through to settlement. Some lenders apply shorter approval validity periods for off-the-plan purchases, and pre-settlement reconfirmation of income and liabilities is common.

Foreign persons, including temporary residents, are generally banned from purchasing established dwellings from 1 April 2025 to 30 June 2029, subject to limited exceptions. Temporary residents may apply for approval to purchase new dwellings or vacant land, and foreign investors who acquire vacant land are subject to a condition that construction be completed within four years. Permanent residents and New Zealand citizens are exempt from foreign investment restrictions and may apply for investment loans on the same basis as Australian citizens.

Where the investment loan is part of a broader construction loan structure, the loan is drawn in stages as construction progresses, and interest is typically capitalised during the construction phase. Once construction is complete and the property is rented, the loan converts to a standard investment loan with either interest-only or principal and interest repayments.

Financial hardship provisions and obligations under the National Credit Code

Investment loans to natural persons are regulated under the National Credit Code, which is Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth). Under section 72 of the Code, a borrower who is unable to meet their obligations may give the credit provider notice of financial hardship, verbally or in writing. The credit provider has 21 days to request further information and must respond within 21 days of receiving that information, or within 28 days if the information is not provided.

The response must either agree to vary the contract or notify the borrower of the refusal and provide contact details for the Australian Financial Complaints Authority. Variations may include a temporary reduction in repayments, a switch from principal and interest to interest-only, or an extension of the loan term. Where rental income has ceased due to tenant default or property damage, and the borrower's salary income alone is insufficient to meet the repayments, a hardship application may provide a pathway to avoid default.

Loans to companies or loans provided wholly or predominantly for business purposes fall outside the National Credit Code and are not subject to the hardship provisions. Where an investment property is held in a corporate structure, the borrower does not have access to the statutory hardship framework, and any variation is at the discretion of the lender under the terms of the commercial loan agreement.

Rentvesting relies on the borrower maintaining both rental payments on their own residence and loan repayments on the investment property. Where either income or rental yield falls short of expectations, cash flow pressure can emerge. Structuring the loan with an interest-only period, an offset account, and a variable rate portion provides flexibility to adjust repayments and manage short-term disruptions without triggering a formal hardship event.

OAUM Securities holds access to investment loan options from banks and lenders across Australia, including products tailored to rentvesting strategies for ACT residents. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions