Investing in real estate is often hailed as one of the most stable and secure ways to grow your wealth. However, when it comes to financing your first investment property, things can get a bit complicated. Unlike buying a home to live in, investment property financing requires careful planning, understanding of loan options, and a solid financial strategy.

Don’t worry—we will walk you through everything you need to know about financing your first investment property, helping you make informed decisions that set you up for long-term success.

1. Understanding Investment Property Financing

Let’s start with the basics: investment property financing is a way to borrow money to purchase a property that you won’t live in but will rent out or hold for long-term appreciation. This is a crucial distinction because lenders view investment properties as riskier than owner-occupied homes. Why? Because the rental market can be unpredictable, and there’s always a chance the property might sit vacant, meaning you’ll be on the hook for mortgage payments without rental income to cover it.

So, before diving into specific loan types and strategies, let’s talk about how financing for investment properties generally works:

  • Deposit: In most cases, you’ll need to provide a 20% deposit to secure an investment loan. This is more than what’s typically required for a standard home loan, but it helps minimise risk for the lender.
  • Loan-to-Value Ratio (LVR): Lenders tend to approve investment loans with a lower LVR, meaning you’ll need a larger deposit or to choose a property with a lower sale price. The lower your LVR, the lower the perceived risk to the bank, which can also mean lower interest rates for you.
  • Equity: If you already own a home, you might be able to use the equity in your property to finance your next investment. This can help you avoid having to save up a separate deposit.

For more tips on calculating how much you can borrow, be sure to check out our borrowing calculator, which can give you a clearer picture of what kind of property you can afford.

2. Investment Loans vs. Owner-Occupied Loans

Here’s where things start to differ between investment properties and homes for personal use. Investment loans are specifically designed for properties that you plan to rent out or hold for capital growth, and they come with a few important distinctions compared to owner-occupied loans:

  • Higher Interest Rates: Since investment properties are riskier in the eyes of lenders, they usually come with higher interest rates than owner-occupied loans. This means your repayments will likely be higher, and you’ll need to factor this into your budget.
  • Additional Scrutiny: To get an investment loan, you’ll need to provide more detailed information about your finances, including potential rental income and your property’s expected capital growth. Lenders will want to see that your property is a sound investment and that you have a strong financial plan in place.
  • Loan Terms: Investment loans can come with different repayment structures, which we’ll dive into below. The key takeaway? You’ll need to be prepared for stricter terms and a more involved approval process than you might be used to with an owner-occupied home loan.

3. Types of Investment Loans: Which One is Right for You?

When financing an investment property, choosing the right loan type is crucial. Here are the most common loan options available to Australian investors:

  • Principal and Interest Loans: With this loan type, you pay off both the principal (the original loan amount) and the interest at the same time. While your repayments will be higher, this option allows you to build equity in your property and pay off your loan faster. If you’re in it for the long haul, a principal and interest loan can be a smart move.
    Pros: You pay less interest over time, build equity quickly, and reduce the overall loan balance faster.
    Cons: Higher monthly repayments, which can be a stretch if your rental property sits vacant for a period.
  • Interest-Only Loans: For the first few years (usually between one and ten), you only pay the interest on the loan, not the principal. This keeps your monthly repayments lower in the short term, but you won’t be building any equity in the property during this period. This option is more suited to investors looking to free up cash flow early on or those planning to sell the property within a few years.
    Pros: Lower monthly repayments during the interest-only period, freeing up cash for other investments.
    Cons: You’ll pay more interest over the life of the loan, and once the interest-only period ends, your repayments will jump up.
  • Fixed-Interest Loans: A fixed-interest loan allows you to lock in an interest rate for a set period, usually between one and five years. This can be a good option if you want repayment certainty and protection against rising interest rates.
    Pros: Predictable repayments, stability, and protection from market fluctuations.
    Cons: If interest rates fall, you’ll be stuck with a higher rate, and there may be penalties for making extra repayments or paying off the loan early.
  • Variable-Interest Loans: With this option, your interest rate will fluctuate with market rates. While variable loans can be more flexible and may offer features like offset accounts, your repayments could increase unexpectedly if interest rates rise.
    Pros: Flexibility, lower repayments when interest rates drop, and often more features.
    Cons: Monthly repayments can rise if interest rates go up, leading to potential financial strain.

4. Specialised Loans for Investors

In addition to standard loans, there are a few specialised financing options designed to meet specific investor needs:

  • Low-Doc Loans: Ideal for self-employed individuals or those without the documentation required for a traditional loan, a low-doc loan allows you to borrow with less paperwork. However, you’ll usually need a larger deposit and will face higher interest rates.
  • Bridging Loans: If you’ve found the perfect investment property but haven’t sold your current property yet, a bridging loan can help you bridge the gap. This is a short-term loan that lets you act quickly while you wait for the sale of your existing property to fund the purchase of the new one.
  • Construction Loans: If you’re planning to build a new property or renovate an existing one, a construction loan can provide funding at key milestones throughout the build. This type of loan is typically paid out in stages, aligning with construction progress.

5. How Much Deposit Do You Need?

In most cases, you’ll need a deposit of at least 20% of the property’s purchase price to secure an investment loan and avoid Lenders Mortgage Insurance (LMI). LMI is an additional cost charged by lenders when you borrow more than 80% of the property’s value, and it can add up to thousands of dollars.

If saving a 20% deposit sounds daunting, there are some ways to get around it:

  • Guarantor Loans: A family member (usually a parent) can use their property as security for your loan, allowing you to avoid LMI and potentially borrow more.
  • Using Equity: If you already own a property, you may be able to use the equity you’ve built up to fund the deposit for your next investment.
  • Buying in Affordable Areas: Consider looking at regional or suburban areas where property prices are lower, reducing the size of the deposit you’ll need.

6. Planning for Your Investment Property Purchase

Once you’ve chosen a loan type and secured financing, it’s time to get your finances in order before making your first property purchase. Here are a few financial planning tips to ensure your investment journey goes smoothly:

  • Save for a Cash Buffer: Even with the best property, there will be times when unexpected expenses arise—repairs, vacancies, or maintenance costs. Set aside some funds as a cash buffer to avoid dipping into your rental income.
  • Budget for Repairs and Maintenance: Owning an investment property means dealing with maintenance costs. Run the numbers and budget for both regular upkeep and unexpected repairs.
  • Set a Competitive Rental Price: Work with a property manager or research similar rentals in the area to ensure your rental price is competitive. This will help attract tenants quickly and maximise your rental income.

Bottom Line: Financing Your Investment Property

Financing your first investment property can feel overwhelming, but with the right strategy and financial planning, you can set yourself up for success. Whether you’re using a traditional mortgage, tapping into your home’s equity, or exploring specialised loans, it’s important to understand your options and choose the one that aligns with your goals.

By planning ahead, using tools like our borrowing calculator, and understanding the different loan structures available, you can make smart decisions that will help you grow your property portfolio and build long-term wealth.