Time to read : 5 Minutes
After decades of helping Australians navigate their financial journeys, I've seen countless people transform their money situation through strategic property investment.
And with interest rates headed down, you might find yourself thinking that now may be a good time to invest in property.
But here's what I've learned: the loan you choose can make or break your investment success.
And to get to the basics, you want to deploy every mortgage dollar for maximum benefit.
So let me share what I’ve found works… and remember this is my experience so always seek professional advice before making a decision.
Why your loan choice matters more than you think
Picture this: You've found the perfect investment property. The numbers stack up beautifully on paper.
But then you discover your loan is costing you an extra $200 per month compared to what you could have secured elsewhere. Over 30 years, that's $72,000 – money that could have helped fund your next property purchase.
This isn't about finding the cheapest rate (though that matters). It's about finding the loan structure that builds wealth, not just debt.
So let’s look at your two main loan options.
Interest-only
For years, interest-only loans were the investment property darling. Pay only the interest for the first five to 10 years, maximising your tax deductions and keeping your monthly payments low.
The logic was sound: preserve cash flow while the property (hopefully) appreciates.
But here's the reality check: Interest-only periods end.
When they do, your repayments can jump dramatically – sometimes by 40% or more. I've seen investors forced to sell because they couldn't handle the payment shock.
Yes, but… you could refinance after the 10 years and restart a new 10-year period.
Principal and interest (P&I)
While you'll pay more monthly from day one, P&I loans offer something invaluable: certainty. You're building equity from the start, and there's no nasty surprise waiting at the end of an interest-only period.
The tax deduction might be slightly less, but remember – you're actually owning more of your asset each month. Which is the ultimate aim, particularly if an investment property is part of your retirement strategy.
The factors that may affect your loan choice
The common thought – which I don’t necessarily agree with but I will get to that in a sec – is that investment debt should be interest-only. The logic? Keep that loan balance nice and high to squeeze every last tax deduction out of it.
This suggestion gets thrown around especially with negatively geared properties – the kind where the investment costs (think interest, repairs and management fees) exceed your rental income each month.
The theory can be clever: maintain maximum debt, claim maximum deductions, let the taxman subsidise your wealth-building.
But here's the reality check that many miss: you're (usually) still bleeding money every single month. Sure, the ATO gives you some back at tax time, but only at your marginal rate – whether that's 16%, 30%, 37% or 45%.
You're still covering the shortfall from your own pocket.
I've run the numbers countless times and after 25 years, someone on the highest tax bracket will actually pay less overall with a P&I loan than with interest-only – even factoring in all those lovely tax deductions.
Remember: with interest-only, you still owe every cent you originally borrowed.
Think about it this way: the monthly savings from interest-only payments plus your extra tax refunds rarely add up to enough to buy another property. Meanwhile, with P&I, you're steadily building actual ownership in your asset.
The whole strategy is on one big assumption – that massive capital gain when you eventually sell. So to make interest-only work on an ongoing basis (assuming you can get it ongoing), you need to be really confident about a big sale price.
I'd rather own more of the asset, not the bank. However, there is one scenario where I'll champion interest-only loans… for a time.
The exception situation
If you're carrying a home loan (what I call Very Bloody Bad Debt because it's costing you after-tax dollars), then paying interest-only on your investment can be a smart strategy: it frees up cash that you can throw straight at your home loan for the home you live in.
Remember, your home loan interest isn't tax-deductible – it's just money down the drain. But investment loan interest is working for you at tax time.
You might choose to pay interest-only on the investment and use the cash flow difference to attack that home loan like your financial future depends on it (because it does).
However, once you've knocked off the home loan, faster, consider flipping back to P&I on your investment properties. Because that’s when you can really hit the accelerator on your wealth-building.
What other loan features matter?
These are some of the important ones:
Offset Accounts
Every dollar you hold in offset accounts is a dollar not accruing interest. Naturally any excess money should go in offsets attached to your home loan, while you still have it. But once you’ve repaid this, look at the interest savings they can net you on your investment property or properties.
Portability
Can you take the loan with you if you sell and buy elsewhere? This can save thousands in establishment fees.
Split Loan Options
Having part fixed, part variable can provide some security of repayments while maintaining flexibility. Learn more about split home loans.
Talk to your lender about the benefits of these loan features and find out if they're right for you.
Bottom line
As always, the best investment property loan isn't the one with the lowest rate advertised in bold headlines. It's the one that aligns with your financial goals, risk tolerance and investment timeline.
Remember, property investment isn't a get-rich-quick scheme – it's a get-rich-slowly strategy that rewards patience, planning, and smart decision-making.
Choose your loan wisely to build real, lasting wealth, and talk to a professional to help make better decisions for your personal situation.
Go deeper:
Should I reduce loan repayments if my bank cuts interest rates?
Can an offset account help you break up with your bank faster?
Disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
