Understanding the Basics of Investment Unit Loans

What Is an Investment Unit Loan?

An investment unit loan is a residential mortgage used to purchase an apartment or unit that you intend to rent out rather than live in. Lenders assess these applications differently to owner-occupied loans because you will rely on rental income to service the debt, and because apartments carry different valuation and resale considerations than detached houses.

When you apply for finance to purchase an investment unit, the lender will look at your existing income, your current debts, the rental yield the property is expected to generate, and the quality of the building itself. Units in high-density buildings or blocks with a small number of total dwellings can attract additional scrutiny or even outright exclusions from some lenders.

How Much Deposit Do You Need for an Investment Unit?

Most lenders require a minimum 10 per cent deposit for an investment property, though some will lend at higher loan-to-value ratios if you are prepared to pay Lenders Mortgage Insurance. A 20 per cent deposit allows you to avoid LMI and gives you access to more competitive investor interest rates.

Consider an investor purchasing a two-bedroom unit in a suburb close to public transport and amenities. With a 20 per cent deposit, they borrow 80 per cent of the purchase price, avoid paying LMI, and retain a buffer in their offset account for vacancy periods or urgent repairs. The same buyer borrowing at 90 per cent would pay an LMI premium that could add several thousand dollars to their upfront costs, capitalised into the loan amount and increasing the total interest paid over time.

If you are using equity from an existing property rather than cash savings, the lender will value both properties and calculate your total borrowing against the combined security. This is common for investors building a portfolio, and it is one of the scenarios we regularly see when buyers want to expand their holdings without liquidating other assets. More detail on how equity can be applied is covered in our investment loans guide.

How Lenders Assess Rental Income

Lenders will include a portion of the expected rental income when calculating your borrowing capacity, but they do not count the full amount. Most lenders apply a shading rate of around 80 per cent to account for vacancy periods, maintenance costs and the possibility that the property may sit empty between tenants.

Under APRA's serviceability buffer, the lender must also assess your ability to service the loan at an interest rate at least 3 percentage points above the actual product rate. That buffer applies to the full loan amount, not just the portion you are borrowing for the investment property. If you already have a mortgage on your home, both loans are tested at the higher rate.

From February this year, each lender is also limited in how many new loans it can write at a debt-to-income ratio of 6 times or greater. The cap applies separately to investor and owner-occupier lending, and while most applicants fall comfortably below that threshold, it does mean that buyers with multiple investment properties or high levels of other debt may find their options narrowed.

Interest Only or Principal and Interest?

Investment loans can be structured as interest-only or principal and interest. An interest-only loan reduces your monthly repayment because you are not paying down the principal during the interest-only period, which is typically one to five years. This can improve cash flow and allow you to direct surplus funds toward other investments or offset balances.

The downside is that you are not building equity through repayments, and when the interest-only period ends, your repayment will increase as you begin paying down the principal. Some investors prefer principal and interest from the outset to reduce the loan balance over time and build a buffer against future rate rises. Your choice will depend on your broader property investment strategy and whether you prioritise cash flow or debt reduction. You can read more about structuring loan repayments in our mortgage repayments section.

Variable Rate or Fixed Rate for Investment Property?

Most investors choose a variable rate because it offers flexibility to make extra repayments, redraw funds, or refinance without penalty. Variable rates also tend to track changes in the official cash rate more closely, which can be an advantage when rates are falling.

Fixed rates lock in your repayment for a set period, usually between one and five years. This provides certainty and protects you against rate rises during the fixed term, but if rates fall or you want to sell or refinance early, you may face break costs. Some investors split their loan between fixed and variable to balance certainty with flexibility. We cover the mechanics of fixed rate products and what happens at expiry in our fixed rate expiry article.

What Lenders Look for in the Unit Itself

Not all units are treated equally by lenders. Buildings with fewer than six units, or apartments in blocks where a single entity owns more than a certain proportion of the units, may be restricted or excluded altogether. Lenders are also cautious about units with commercial tenancies on the ground floor, properties in resort-style complexes, or buildings with known cladding or structural issues.

Body corporate records are reviewed as part of the valuation process. The lender will want to see that the sinking fund is healthy, that levies are up to date, and that there are no major works planned that could affect the value or salability of the unit. If the body corporate has recently levied owners for urgent repairs or if there is ongoing legal action involving the owners corporation, that can trigger a decline or a reduced valuation.

Negative Gearing and Recent Tax Changes

For units purchased before 7:30pm AEST on 12 May this year, the existing negative gearing rules continue to apply. If your property expenses exceed your rental income, you can offset that loss against your other assessable income, including salary and wages.

For units purchased on or after that date, new rules apply from 1 July next year. Rental losses on those properties will be quarantined and can only be offset against other residential rental income or carried forward to offset future rental income or capital gains. You will not be able to claim the loss against salary or wages. The change is intended to encourage investment in new builds, which remain eligible for the existing negative gearing treatment. This is a significant shift for investors who rely on tax deductions to subsidise holding costs, and it is worth discussing your structure with a tax adviser before you commit to a purchase.

When to Consider Refinancing Your Investment Loan

Refinancing an investment property loan can make sense if you are able to secure a lower rate, release equity for another purchase, or restructure your loan to improve cash flow. Many investors refinance after a fixed term ends or once they have paid down enough principal to move into a lower LVR band and access a better rate discount.

You can also refinance to consolidate debt, switch from interest-only to principal and interest, or move to a lender that offers features better suited to your current situation, such as an offset account or redraw facility. Keep in mind that refinancing involves valuation fees, discharge fees from your current lender, and application fees with the new lender, so the rate saving needs to justify the cost. Our team can run the numbers and show you whether a refinance would leave you better off, and we work with lenders across Australia to find the right fit for your circumstances. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions