Investment Loans: What Not to Assume Before You Buy

Buying an investment property feels like a natural next step once you've settled into your own home. The assumption is often that if you can afford one property, the bank will see a second the same way.

That assumption no longer holds. Lenders assess investment loans differently to owner-occupier home loans, and regulatory settings introduced in February shifted how much you can borrow based on your total debt relative to income. Add to that tax law changes taking effect in mid-2027, and the fundamentals of property investment have shifted in ways that matter before you sign a contract.

How Lenders Assess Investment Loan Applications Differently

Investment loan applications are assessed using a higher interest rate buffer and stricter income verification than owner-occupier applications. The serviceability buffer sits at three percentage points above the product rate, meaning your income is tested against a rate well above what you'll actually pay.

Consider a couple earning a combined income of $160,000 who already hold an owner-occupied loan with a balance of $520,000. They want to borrow $480,000 to purchase a unit in Clayton as an investment. The rental income from that unit, assessed at 80 per cent of the stated rent to account for vacancy and maintenance periods, is added to their income. But their existing mortgage, the new proposed loan, and all other debts are tested at a rate around three percentage points higher than the current variable rate. That couple may find their borrowing capacity is lower than expected, even with rental income included.

The debt-to-income cap introduced in February also plays a role. Lenders can only approve a limited portion of their new lending to borrowers whose total debt exceeds six times their gross income. If your combined debt pushes you over that threshold, some lenders will decline the application outright, while others may approve it but at a higher rate or with additional conditions.

The Deposit You'll Need and How Lenders Mortgage Insurance Applies

Most lenders require a minimum 10 per cent deposit for investment property purchases, though some will lend at higher loan-to-value ratios if you pay Lenders Mortgage Insurance. LMI for investment loans is calculated differently and costs more than the equivalent cover on an owner-occupier loan, because the lender's risk is higher.

If you're using equity from your existing home to fund the deposit, the lender will order a valuation on both properties. The amount you can access depends on how much equity has accumulated in your home and the combined loan-to-value ratio across both securities. Releasing equity to fund a deposit is common, but it increases the debt secured against your home, which means your repayments rise even before the investment loan settles.

Interest Only Repayments and Why Investors Use Them

Interest-only repayment structures allow you to pay only the interest charged each month, without reducing the loan balance. This keeps your monthly repayment lower, which can be helpful when rental income doesn't fully cover the loan cost.

Interest-only periods are typically available for up to five years on investment loans, after which the loan reverts to principal and interest repayments. The benefit is cash flow relief in the early years, particularly if you're negatively geared. The downside is that your loan balance doesn't reduce during that period, so you'll pay more interest over the life of the loan if you don't make additional repayments voluntarily.

Some lenders offer interest-only loans at the same rate as principal and interest, while others apply a margin. That margin, even if it's only 0.10 to 0.25 percentage points, compounds over time and should be factored into your comparison of loan products.

Negative Gearing and the Tax Law Changes Taking Effect in July 2027

Under current rules, if your investment property costs more to hold than it generates in rent, you can offset that loss against your other income, such as salary or wages. From 1 July 2027, that changes for properties purchased after 7:30pm on 12 May 2026.

If you buy an established dwelling after that date and time, rental losses can only be offset against other residential rental income or carried forward to offset future rental income or capital gains from residential property. You can't use those losses to reduce your taxable salary. Properties purchased before that date, or those under contract at that time, continue under the old rules until sold.

The exemption applies to eligible new residential dwellings, which includes properties built on previously vacant land and developments that increase the total number of dwellings on a site. A knock-down rebuild that replaces one dwelling with one dwelling does not qualify. If a new build is occupied for more than 12 months before it's sold to you as an investor, you lose access to the negative gearing exemption.

For a couple buying their first investment property in the second half of this year, this distinction matters. If you're considering an established unit in Mount Waverley or an older townhouse in Oakleigh, rental losses from July 2027 onward will be quarantined. If you're looking at a newly completed apartment in a precinct like Clayton or a house and land package in Mulgrave, and it qualifies as an eligible new build, you retain the ability to offset losses against your salary.

Capital Gains Tax and the Indexation Rules from July 2027

From 1 July 2027, the 50 per cent capital gains tax discount is replaced with cost base indexation and a minimum 30 per cent tax rate on real capital gains for most investment properties. Gains that accrued before 1 July 2027 remain under the current rules.

This means if you sell an investment property after holding it for several years, the portion of the gain attributable to the period before July 2027 is still eligible for the 50 per cent discount, but gains from July 2027 onward are taxed under the new framework. For eligible new builds, you can choose between the 50 per cent discount and the indexation method, whichever results in a lower tax liability.

The mechanics of cost base indexation mean your purchase price is adjusted for inflation using the Consumer Price Index, reducing the taxable gain in real terms. Whether that results in a better outcome than the 50 per cent discount depends on inflation over the holding period and your marginal tax rate at the time of sale.

Fixed Rate, Variable Rate, or a Split Loan Structure

Investment loan rates are typically higher than owner-occupier rates, even when comparing the same product from the same lender. The margin varies, but it's common to see investment rates sitting 0.20 to 0.50 percentage points above equivalent owner-occupier rates.

Variable rate loans give you flexibility to make extra repayments without penalty and allow you to benefit from rate cuts when they occur. Fixed rate loans provide repayment certainty but generally come with restrictions on additional repayments and can trigger break costs if you refinance or sell before the fixed period ends.

A split loan structure, where part of the loan is fixed and part is variable, is common among investors who want some certainty around cash flow but don't want to lock in the entire balance. If you're planning to use rental income to cover most of the repayment and your budget is tight, fixing a portion can help with planning, particularly if you expect rate movements in either direction over the next few years.

Rental Income, Vacancy Rates and Serviceability

Lenders assess rental income at 80 per cent of the amount stated on a rental appraisal or existing lease, to account for periods when the property may be vacant or require maintenance between tenants. That 20 per cent reduction is standard across most lenders and is applied before the rental income is added to your serviceability calculation.

If you're buying a unit in Glen Waverley with an expected rental return of $500 per week, the lender will assess your income as though you're receiving $400 per week from that property. If the area has a higher vacancy rate or the property type is harder to lease, that haircut can affect whether the loan is affordable on paper, even if you're confident the rent will be achieved in practice.

Vacancy rates vary by location and property type. Units in established suburbs closer to transport and amenities tend to have lower vacancy periods than houses in outer growth corridors, though this is not absolute. A two-bedroom unit near Box Hill station will generally lease faster than a four-bedroom house in a developing estate with limited infrastructure, but the rental yield on the house may be higher relative to purchase price.

What Happens When You Want to Refinance or Expand Your Portfolio

Once your first investment property is settled and tenanted, your borrowing position changes again. The loan is now part of your debt profile, and the rental income is part of your serviceability. If you want to refinance your investment loan to access equity or secure a lower rate, the lender will reassess your entire position using current serviceability rules and current property values.

If property values have increased and your loan balance has reduced, you may be able to access additional equity for a second investment property. If values have fallen or your income has changed, you may find your borrowing capacity has contracted, even if your repayments are comfortably managed.

Expanding your property portfolio involves repeating the same serviceability and deposit process, but with the added complexity of multiple securities and multiple income streams. Lenders assess the combined position, not each property in isolation. That means a single property with poor rental performance or high vacancy can affect your ability to borrow for the next purchase, even if your other investments are performing well.

Refinancing can also be a tool to restructure your loans as your strategy evolves. If you started with interest-only repayments and have now built enough buffer to switch to principal and interest, refinancing to a lower rate while changing the repayment structure can reduce your interest cost over time without affecting your cash flow significantly.

If you're ready to talk through your specific situation and understand how the current lending environment affects your ability to invest, call one of our team or book an appointment at a time that works for you.

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