By Jason Given · 2026-05-06 · 8 min read
Why structure matters more than you think
Most first-time investors focus on finding the right property. The experienced ones focus on getting the loan structure right before they sign anything. The difference in cash flow and future borrowing capacity between a well-structured loan and a poorly structured one can be tens of thousands of dollars over five years.
Interest only vs principal and interest
The most common question: should I pay interest only (IO) or principal and interest (P&I) on my investment loan?
For most investors, IO is the better choice - at least in the early years. Here is why:
- 1.Lower repayments - With IO you pay only the interest for the interest-only period, usually up to five years. With P&I you also pay down the balance, so the repayment is higher.
- 2.Cash flow - IO repayments are lower, freeing up cash to pay down your owner-occupied home loan faster. Ask your accountant whether that suits your tax position.
- 3.Next deposit - Lower IO repayments mean you accumulate surplus cash faster for your next investment deposit.
The trade-off: You are not reducing the investment loan balance, which means you carry the debt longer. The strategy works best when rental income is rising and you plan to hold long-term.
Never cross-collateralise
Cross-collateralisation - using both your home and investment property as security on the same loan facility - is one of the most common structural mistakes investors make. It seems harmless at the time but creates problems later:
- 1.Lender control - If you want to sell one property, the lender assesses the entire portfolio and can force you to repay a portion even if you do not want to.
- 2.Refinancing difficulty - Moving to a different lender becomes complex because both properties are tied together.
- 3.Messy records - Tangled security makes it harder to show which loan belongs to which property, which is the first thing your accountant will ask.
The solution: keep your investment loan completely separate, secured only against the investment property. Use a separate loan against your home equity to access your deposit - these are two distinct facilities.
Using equity from your home
If your home has increased in value since purchase, you likely have usable equity. Lenders will generally lend up to 80% of your home's value (without LMI) - subtract your existing mortgage and the difference is your usable equity.
Example: Home value $900,000. Existing mortgage $450,000. 80% of $900K = $720K. Usable equity = $270,000. This can fund a deposit and purchase costs for an investment property up to approximately $1.35 million (at 20% deposit).
How lenders assess your investment loan
Lenders add 70-80% of expected rental income to your gross income when assessing investment loan serviceability. They then stress-test the total at 3% above the actual rate, so you are assessed at a rate well above what you will actually pay.
This is why getting pre-approval before you start searching matters - you want to know your exact borrowing capacity before you make an offer on a property.
Lendology's approach: We structure investment loans to keep each purpose in its own account, keep securities separate, and preserve your borrowing capacity for future purchases. Book an investor consultation →
Frequently asked questions
Should I use interest only or principal and interest for an investment loan?
Most investors use interest-only (IO) on investment properties, particularly in the early years. This reduces your cash flow commitment, freeing funds for your owner-occupied loan or next deposit. IO periods are typically 5 years - after that, the loan reverts to P&I unless you refinance or renew.
Can I use equity in my home to buy an investment property?
Yes - this is one of the most common ways Adelaide investors fund their first investment. If your home has increased in value, you can access a portion of that equity as a deposit for an investment property, often without needing cash savings. The key is to keep the loans separate - cross-collateralisation (using both properties as security on the same loan) should generally be avoided.
What is cross-collateralisation and why should I avoid it?
Cross-collateralisation means the lender uses both your home and investment property as security on one or more loans. While it can sometimes allow a higher borrowing amount, it gives the lender disproportionate control - if you want to sell one property, the lender must agree and values are assessed together. Keeping loans separate gives you more flexibility and cleaner records for your accountant.
How do lenders assess rental income for investment loans?
Lenders typically count 70-80% of expected rental income in your servicing calculation (after a vacancy buffer). They then add this to your other income and assess your ability to service the full loan at a stress-tested rate (currently 3% above the actual rate). This is why some investors can borrow more than they expect - rental income genuinely helps serviceability.
Get your investment loan structure right from the start
The structure affects your cash flow and how easily you can buy the next property. Jason or Steve will talk you through how to set it up properly.
15 minutes with Jason. No cost to you, the lender pays us when your loan settles. You pick a time, we call you.
Rather talk now? Call 08 8270 5138.