When to Choose Interest Only vs Principal and Interest

What an Investment Loan Actually Does

An investment loan helps you purchase a property you'll rent out rather than live in. The structure differs from an owner-occupier loan because lenders assess the property's rental income as part of your borrowing capacity, and the tax treatment changes completely.

Investment loans typically come with slightly higher interest rates than loans for homes you'll live in. Lenders price the additional risk into the product, though the gap between the two has narrowed in recent years. You'll also see different deposit requirements. Most lenders want at least a 10% deposit for an investment property, though some will lend with less if you're prepared to pay Lenders Mortgage Insurance.

The rental income from your property doesn't count dollar-for-dollar when lenders calculate what you can borrow. Most lenders apply a discount, often around 20%, to account for potential vacancy periods and maintenance costs. If a property in Albury rents for $400 per week, the lender might only count $320 of that income when working out your borrowing capacity.

Interest Only Repayments for Investment Properties

With an interest only loan, you only pay the interest charged each month. The loan balance stays the same for the interest only period, which is typically between one and five years.

This structure suits investors who want to minimise their monthly repayments and maximise the tax deductions available through negative gearing. Because you're only paying interest, all of that repayment is typically tax deductible when the property is rented out. The lower repayment also helps with cash flow if you're holding multiple properties or building a portfolio over time.

Consider an investor who purchases a unit near Albury's CBD for rental purposes. With an interest only loan, their monthly repayment might sit around $1,800, compared to $2,400 on a principal and interest loan for the same amount. That $600 difference each month gives them breathing room to cover body corporate fees, repairs, and periods when the property sits vacant between tenants.

The trade-off is that you're not reducing the debt. After five years of interest only repayments, you still owe the full amount you borrowed. When the interest only period ends, you'll either need to refinance to another interest only term or switch to principal and interest repayments, which will be higher than if you'd been paying down the loan from the start.

Principal and Interest Repayments for Investors

Principal and interest repayments mean you're paying down the loan balance while also covering the interest charged. Each repayment reduces what you owe, building equity in the property over time.

This approach works when your goal is to own the property outright, or when you want to reduce debt before retirement. It also makes sense if rental income in your area is strong enough to cover most or all of the higher repayment amount.

Albury's rental market has stayed relatively stable, with vacancy rates typically sitting below 2% in recent years. Properties near the border, particularly houses within a few kilometres of the Hume Highway, tend to hold tenants well due to demand from families relocating for work. In this environment, an investor with strong rental income might choose principal and interest repayments to chip away at the loan balance while the property generates consistent returns.

The downside for investors is that only the interest portion of your repayment is tax deductible. The principal component isn't claimable, which means your taxable income from the property will be higher compared to an interest only loan. For someone in a high tax bracket, that difference can be significant.

If you're considering expanding your portfolio, our guide on buying your first investment property covers how to structure your loans when you're planning to hold multiple properties.

How Recent Tax Changes Affect Your Decision

From 1 July 2027, the way negative gearing and capital gains tax work will change for established residential properties purchased after 12 May 2026. If you buy an established property in Albury from 13 May 2026 onwards, losses from that property can only be offset against other residential property income, not against your wage or salary.

This means the tax benefit of an interest only loan on an established property will be less valuable if you're relying on negative gearing to reduce your overall tax bill. You can still claim the interest as a deduction, but only against income from residential property, not against other income sources.

New builds purchased after that date aren't affected by the change. You'll still be able to choose between the current 50% capital gains discount or the new indexed arrangements, and negative gearing will work as it does now.

For properties purchased before 13 May 2026, the existing rules remain in place. If you already own an investment property in Albury, or if you're settling on one you bought before that date, these changes won't apply to you.

If you're planning to refinance an investment loan in the coming months, the timing of your purchase will affect which tax treatment applies.

Fixed Rate vs Variable Rate for Investment Loans

Fixed rates lock in your interest rate for a set period, usually between one and five years. You'll know exactly what your repayment will be during that time, which makes budgeting easier if you're managing multiple properties or relying on rental income to cover most of your costs.

Variable rates move up and down with the market. You'll benefit when rates drop, but your repayments will increase when rates rise. Most variable rate investment loans also come with features like offset accounts and the ability to make extra repayments without penalty, which can be useful if you're trying to reduce debt or build a buffer for unexpected costs.

Some investors split their loan between fixed and variable. Half the loan stays at a fixed rate for certainty, while the other half remains variable so they can access features like an offset account or make extra repayments when cash flow allows.

Albury's property market has seen consistent demand from investors, particularly for houses in established suburbs like Lavington and Thurgoona. The mix of local employment, the university, and border traffic keeps the rental market active. In this type of market, having flexibility through a variable rate can be valuable, but the certainty of a fixed rate can also help if you're stretching your borrowing capacity.

Deposit and Equity Requirements for Investment Loans

Most lenders want at least a 10% deposit for an investment property, though you'll pay LMI if your deposit is less than 20%. The size of your deposit affects your interest rate, your borrowing capacity, and whether you'll need to pay LMI upfront or capitalise it into the loan.

If you already own a home, you might be able to use equity in that property as your deposit. This approach, sometimes called leveraging equity, lets you buy an investment property without needing to save a separate cash deposit. The risk is that both properties are now securing the loan, so if something goes wrong with the investment property, your home is also on the line.

Lenders assess equity-based purchases carefully. They'll look at your total debt across both properties, your rental income, and your ability to service both loans if the investment property sits vacant for a period. In Albury, where vacancy rates are low, this risk is smaller, but lenders still factor it into their calculations.

For more detail on how equity release works, our page on equity release loans explains the structure and what lenders look for.

Loan Features That Matter for Investors

Offset accounts let you park your savings in an account linked to your loan. The balance in the offset account reduces the amount of interest you're charged, without locking the money away. For investors, this means you can reduce your interest costs while keeping cash available for repairs, upgrades, or the next deposit.

Redraw facilities let you access any extra repayments you've made on the loan. This is less common on interest only loans, but it can be useful on principal and interest loans if you've been making additional repayments and need access to that money later.

Some lenders charge higher fees for investment loans, or limit the features available compared to owner-occupier loans. It's worth comparing what's included in the loan and whether those features will actually be useful for your situation.

When to Speak to a Broker About Investment Loans

If you're considering your first investment property, or if you're expanding a portfolio you've already started, talking to a broker early can help you structure the loan in a way that suits your goals. We work with lenders across Australia and can show you what's available based on your deposit, your income, and the type of property you're looking at.

Albury's market offers opportunities for investors, particularly in suburbs close to the hospital, university, and commercial centres. The rental demand is steady, and the range of property types means you can find something that fits your budget and your strategy.

Call one of our team or book an appointment at a time that works for you. We'll walk through your options, explain how the recent tax changes affect your situation, and help you choose a loan structure that makes sense for the property you're buying and the income you're generating.

Frequently Asked Questions