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When borrowing for investment there is a dramatic increase in the subtle but important differences between lenders. It is here that a Creative Finance consultant can often make the biggest difference.

Why the greater variation?

The main reason for the greater variation is that when you borrow to invest lenders are less strictly regulated and they make allowances for a range of factors such as tax deductibility and whether the money will be used to generate additional income. Most lenders will allow for the same factors but to differing degrees. So depending on your personal situation one lender may look at your situation more favourably than another. Examples of factors that lenders will allow for when borrowing for investment include

  • Is the interest tax deductible? If so they will add back the tax deduction in determining what loan you can afford.

  • When buying a property, what rent can you reasonably expect? Different Banks consider different percentage eg Some 50%, some 75%, some 100% of expected rent. Knowing this may help you get a loan over the line.

  • Shares & Managed funds – the vast majority of lenders do not allow for the income from these investments but a few do.

Can I Borrow more or less for Investment?

Due to having less legal obligations, allowing for the tax deductibility of interest, and the potential income from the investments you can always borrow more for investment for any given level of income. However you still need to have the necessary equity in any security property.

Borrowing Limitations

When borrowing for investment you will generally be limited to 80% of the value of your property. Whilst some lenders are willing to go as far as 95% for investment property they may charge a higher rate and lenders mortgage insurance is payable. Careful consideration should be given as to how this affects the viability of an investment.

Other Features

  • When borrowing for investment you will have the option of Principal and Interest (P&I) or Interest Only (I/O). We recommend that you read ‘Repayments: Principal & Interest or Interest Only’ and talk to a Creative Finance consultant in this regard.

  • It is important that you are aware that banks may charge a different base rate for investment eg 0.1% higher. You need to make sure you are comparing like with like when someone quotes you a rate in terms of a discount eg “0.7% off our normal rates!”

  • Some lenders will restrict their discounts on a line of credit or, like above, any discount is applied to a higher starting rate than a normal loan.

The important point to take from the above is that when borrowing for investment you need to be extremely careful when comparing lenders. We strongly recommend you talk to a Creative Finance professional to assist you in this process.