Investment Property Loans — Getting the Structure Right

The two primary loan types for investment property are principal and interest (P&I) and interest-only (IO). IO loans give you a lower repayment in the short term — only interest, no principal reduction — maximising your tax deduction while preserving cash flow. P&I loans cost more monthly but reduce your debt and build equity faster. For negatively geared investment properties, IO is often the preferred structure because every dollar of interest is deductible, and the cash flow is easier to service. However, IO periods are typically 5 years, after which they revert to P&I — often with a higher rate. Plan your exit or refinancing strategy before the IO period ends. Offset accounts on investment loans are a nuanced topic. An offset account on your investment loan reduces the interest you pay — but that interest is deductible. This means an offset on your investment loan is less valuable than an offset on your owner-occupied home loan (where interest isn't deductible). The correct structure: put surplus cash in the offset on your home loan, keep investment loan interest maximised.

Cross-collateralisation (cross-securing) occurs when a lender holds multiple properties as security for multiple loans. It's common when borrowers use the same bank for all their properties. Banks love it because it reduces their risk — if one property underperforms, they can access equity in another. Investors generally hate it because it reduces their flexibility. With cross-collateralised loans, you can't sell one property without the bank's approval for the whole structure. Refinancing becomes complex. If your portfolio grows and you want to sell one property to buy another, you're at the mercy of the bank's valuation of all your properties simultaneously. The better structure: individual loans, each secured against only one property. Use separate lenders if necessary. A good mortgage broker who specialises in investors will set this up correctly. Expect to pay slightly higher rates for the flexibility — it's usually worth it.