Investment Loans: What Not to Build Around Passive Income

Endodontists typically approach property investment with the same precision they apply to root canal systems, but the loan structure that supports your investment goals often works in counterintuitive ways.

The typical instinct is to maximise rental yield and minimise vacancy. Yet under the current legislation, negative gearing has been quarantined for residential properties acquired from mid-May 2026, and capital gains tax treatment has shifted toward indexation rather than the flat discount. This changes the calculation for how you fund an investment property and which repayment structure delivers the outcome you want.

How the Negative Gearing Quarantine Affects Loan Structure

For residential investment properties acquired on or after 7:30pm AEST on 12 May 2026, net rental losses are quarantined from 1 July 2027. Losses can only be offset against other residential rental income or carried forward to offset future residential rental income or capital gains. You cannot offset a rental loss against your specialist income.

Consider an endodontist who purchases an inner-city apartment in August 2026 with a 20 per cent deposit and a variable rate loan on interest-only terms. The property generates $38,000 in annual rent but costs $52,000 in interest and holding expenses. Under the old rules, the $14,000 loss would have reduced taxable income in the year it occurred. From 1 July 2027, that loss is banked and only available when the property turns a profit or when you sell and realise a capital gain.

This makes the traditional high-gearing, high-deduction strategy less responsive. Properties acquired between 7:30pm AEST on 12 May 2026 and 30 June 2027 may be negatively geared under the existing rules until 30 June 2027 only. After that transition period, the quarantine applies regardless of when you settled.

Interest Only or Principal and Interest for Investment

An interest-only loan keeps repayments lower and frees up cash flow, which is useful if you are servicing multiple loans or building a second property deposit. Principal and interest repayments reduce the loan balance and improve equity over time, which matters when you want to leverage that equity for further investment.

In our experience, endodontists often select interest-only terms for the first five years, then convert to principal and interest once income or rental return has improved. That approach still works, but with quarantined losses, the cash flow benefit of interest-only is less pronounced because you are not receiving an immediate tax offset.

Under APRA's Prudential Standard APS 112, a long-term interest-only residential loan must be classified as non-standard where the LVR exceeds 80 per cent and the contractual interest-only period is greater than 5 years or is unspecified. This affects the lender's capital treatment and may influence pricing or policy. Most lenders cap interest-only periods at five years for investor loans above 80 per cent LVR, though some extend to ten years at lower LVRs.

Debt to Income Limits and Serviceability for Specialist Borrowers

From 1 February 2026, each ADI may fund no more than 20 per cent of new investor loans at a debt-to-income ratio of 6 times or greater. The caps apply separately to each ADI's investor and owner-occupier portfolios and to new lending only. This does not mean you cannot borrow at a DTI above 6, but it does mean lenders manage their allocation carefully and some will decline applications above that threshold even when serviceability is clear.

Endodontists with annual income around $300,000 to $400,000 can usually service a combined debt load well above the 6x DTI threshold, but you may need to spread borrowing across multiple lenders or accept a slightly higher rate to access a lender with capacity under the cap. APRA requires ADIs to assess a new borrower's capacity to service a residential mortgage at an interest rate at least 3 percentage points above the loan product rate. This buffer is applied to the entire loan amount, including any existing debt, which tightens the amount you can borrow compared to assessments conducted before the buffer was increased.

If you are considering investment loan refinancing, switching lenders does not trigger the DTI cap on existing debt, only on new lending. Refinancing an existing investment loan to release equity or adjust the rate is treated as a variation, not a new investor loan, provided the loan amount does not increase materially beyond the current balance and associated costs.

Variable or Fixed Rates for Investment Property

Variable rates give you the flexibility to make extra repayments, redraw funds, and switch loan features without break costs. Fixed rates lock in certainty but limit your options if circumstances change or if you want to access equity before the fixed term ends.

A split loan, part variable and part fixed, is common among dental specialists who want rate certainty on a portion of the debt while retaining access to offset and redraw on the variable portion. The variable component can be paired with an offset account linked to rental income, which reduces the interest charged without affecting the deductibility of the loan. Interest on borrowings used to acquire or hold residential rental property is deductible against assessable income to the extent the property is rented or held to produce assessable income. Depositing rental income into an offset does not change this, because the loan purpose remains investment.

If you lock in a fixed rate and then want to sell the property or pay down the loan before the fixed period ends, break costs may apply. These are calculated based on the difference between the fixed rate you are paying and the wholesale rate the lender can now achieve for the remaining term. In a rising rate environment, break costs are usually nil or minor. In a falling rate environment, they can be substantial.

Equity Release and Portfolio Expansion

Once your first investment property has grown in value or your owner-occupied home has appreciated, you may want to release equity to fund a second purchase. Lenders will assess the combined loan-to-value ratio across both properties and apply serviceability tests to the total debt.

Consider an endodontist who owns a home valued at $1.4 million with a remaining mortgage of $500,000 and an investment property valued at $850,000 with a loan of $680,000. The combined equity is around $1.07 million. If the lender will advance up to 80 per cent across the portfolio without LMI, the maximum total lending is approximately $1.8 million, leaving around $600,000 in available equity. After allowing for costs and buffers, this could support a deposit and costs on a second investment property.

The complication is serviceability. The lender will assess rental income at a discount, typically 80 per cent of market rent, to account for vacancy and management costs. They will also add the full repayment of the new loan into the serviceability calculation at the buffer rate. If your total debt service exceeds around 30 to 40 per cent of your gross income after applying these adjustments, the lender may reduce the amount or decline the application. Expanding your property portfolio as a specialist borrower usually requires planning across multiple financial years to stage purchases as income rises and debt reduces.

CGT Indexation and the Timing of Investment Purchases

Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, from 1 July 2027, the 50 per cent CGT discount for individuals, trusts and partnerships is replaced for affected assets with cost base indexation using the Consumer Price Index and a minimum 30 per cent tax rate on real capital gains. Assets owned before 1 July 2027 and sold after that date are taxed under the existing rules for the portion of the gain accruing before 1 July 2027 and under the new rules for the portion accruing after that date.

This means a property purchased in 2026 and sold in 2035 will have its gain apportioned. The gain up to 30 June 2027 is taxed under the 50 per cent discount. The gain from 1 July 2027 onward is indexed for inflation and taxed at a minimum 30 per cent rate. Whether this results in a higher or lower tax outcome depends on the rate of inflation, your marginal tax rate, and the holding period.

For endodontists on the top marginal rate, the indexed gain taxed at 30 per cent may deliver a lower effective rate than the discounted gain taxed at your full marginal rate, particularly if inflation is moderate and the holding period is long. The reverse is true if inflation is low and your marginal rate drops in retirement.

Investors in eligible new build residential properties may elect either the 50 per cent CGT discount or indexation with the 30 per cent minimum tax. An eligible new build is one constructed on previously vacant land or where a rebuild increases the dwelling count. Purchasing a newly completed apartment or townhouse off the plan may qualify, but a renovated older property does not. If you do acquire an eligible new build, you also retain access to negative gearing under the pre-2027 rules, which materially changes the investment case.

How LMI and LVR Interact on Investment Loans

Lenders typically cap investment loans at 90 per cent LVR with LMI and 80 per cent LVR without. Some LMI waivers are available to dental specialists at up to 90 or 95 per cent LVR for owner-occupied loans, but these generally do not extend to investment lending. A handful of lenders will waive LMI on investment loans at 85 or 90 per cent LVR for medical and dental professionals, but policy varies and is often limited to established dwellings in metro postcodes.

The premium for LMI on an investment loan is higher than on an owner-occupied loan at the same LVR because the insurer prices for higher default risk. The premium is calculated on the amount above 80 per cent LVR and can be capitalised into the loan. Stamp duty on the premium applies in some states.

If you are buying your first investment property and want to minimise upfront costs, borrowing at 80 per cent LVR without LMI usually delivers a lower total cost of funds over the life of the loan, even if it means waiting a few additional months to build the deposit.

Call one of our team or book an appointment at a time that works for you. We work with lenders who understand specialist income and can structure investment loans around the legislation and your long-term goals, not just the rental yield in year one.

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