Investment Loans and What to Know Before You Start

An investment loan lets you borrow money to purchase a property you intend to rent out rather than live in. The lender assesses your application differently to an owner-occupier loan because rental income forms part of your serviceability, and the property itself carries different risk.

New Town sits close to Hobart's CBD, with a mix of older worker's cottages, newer units and townhouses that appeal to students, young professionals and government workers. Rental demand stays consistent thanks to the nearby Royal Hobart Hospital, the University of Tasmania Sandy Bay campus and access into the city along Elizabeth Street. Many first-time investors look at New Town precisely because the rental pool is broad and vacancy periods tend to be short.

Before you submit an application or start browsing listings, you need to understand how lenders calculate what you can borrow, how rental income is treated, and what deposit and documentation requirements apply. The rules differ enough from a standard home loan that assumptions based on your own borrowing experience can lead to surprises during assessment.

How Lenders Assess Rental Income

Lenders include rental income in your serviceability calculation, but they do not count the full amount. Most lenders apply a shading factor of 70 to 80 per cent to allow for vacancy periods, maintenance costs and potential rent arrears. If a property in New Town generates $450 per week, the lender might assess it as $315 to $360 per week of usable income.

The exact shading percentage depends on the lender and the property type. Units and apartments often face slightly higher shading than houses because body corporate fees reduce net income and vacancy risk can be marginally higher in oversupplied markets. In our experience, borrowers who assume the full rent will offset their mortgage repayment can be caught short when the loan amount comes back lower than expected.

Consider a buyer looking at a two-bedroom unit near Lansdowne Crescent generating $420 per week in rent. At 75 per cent shading, the lender treats that as $315 per week. If the buyer earns $85,000 a year and already has a $15,000 personal loan, the rental income boosts their serviceability but the reduction from full rent can mean they borrow $50,000 to $70,000 less than they initially calculated using an online calculator that did not apply shading.

Deposit Requirements for Investment Loans

Most lenders require a minimum 10 per cent deposit plus costs for an investment loan, though some will lend at higher loan-to-value ratios if you pay Lenders Mortgage Insurance. LMI premiums on investment loans are higher than on owner-occupier loans at the same LVR because the lender's risk is greater.

If you are buying in New Town and the property sits within the lender's postcode risk parameters, you can usually access LVR up to 90 per cent with LMI, provided your income and credit profile support it. Above 90 per cent LVR, options narrow significantly and most mainstream lenders will not proceed regardless of LMI.

Genuine savings rules also apply. Lenders want to see at least 5 per cent of the purchase price held in your own savings for a minimum of three months. Gifts from family, proceeds from asset sales or bonuses paid within the three-month window may not count as genuine savings, though some lenders offer more flexibility if you can demonstrate a strong savings pattern over time.

Interest Rates and Loan Structures for Investors

Investment loan rates sit higher than owner-occupier rates, typically between 0.20 and 0.50 percentage points depending on the lender and your LVR. The difference reflects the higher default risk lenders assign to investment properties.

You can choose between variable rate, fixed rate or a split loan. Interest-only repayments are common on investment loans because they reduce the monthly outgoing, which can help with cash flow if the property is negatively geared. An interest-only period usually runs for one to five years, after which the loan reverts to principal and interest unless you apply to extend the interest-only term.

A borrower purchasing a unit in New Town for rental purposes might take a $450,000 loan on interest-only terms at current variable rates. Monthly repayments would be lower than a principal and interest loan, freeing up cash to cover rates, insurance, property management fees and maintenance. Once the interest-only period ends, repayments increase as principal starts being repaid. That increase can be substantial, so it needs to be factored into your longer-term budget.

Negative Gearing and the Current Rules

Negative gearing means the costs of holding the property, including loan interest, exceed the rental income. That loss can be offset against your other taxable income, reducing your overall tax bill. For properties held before 12 May this year, or for eligible new builds purchased after that date, negative gearing continues to work this way.

For established properties purchased after 12 May and not classified as new builds, losses can only be offset against income from other residential properties or carried forward to offset future property income or capital gains. This change affects how you model the investment return and whether an older property in New Town that requires higher maintenance spending still makes sense compared to a newer unit where depreciation deductions might be higher.

Interest on your investment loan remains deductible regardless of the negative gearing changes, as do other holding costs such as council rates, water rates, insurance, property management fees, repairs and depreciation. The difference is where you can apply the loss if your costs exceed your rent.

Serviceability Testing and the Three Per Cent Buffer

Every lender must assess your ability to service the loan at a rate at least 3.0 percentage points above the actual interest rate. If you are applying for a loan at a variable rate, the lender tests whether you could still afford repayments if that rate increased by three percentage points.

This buffer is the reason some borrowers find they cannot borrow as much as they expected. A buyer earning $90,000 per year with $500 per week in rent from a New Town property, shaded to $375 per week, might be able to service a $420,000 loan at the actual rate but only a $350,000 loan when tested at the buffer rate. The buffer applies to all new loans and is set by the Australian Prudential Regulation Authority.

Applying for an Investment Loan with Existing Debt

If you already own a home with a mortgage, the lender includes that mortgage in your serviceability calculation even if you plan to rent out your current home and move elsewhere. Both mortgages are tested at the buffer rate, and both properties' rental income is shaded.

This can limit how much you can borrow for the investment property. In a scenario like this, a borrower with $380,000 owing on their current home, which they plan to rent for $520 per week, and applying for a $400,000 loan to buy a unit in New Town renting for $430 per week, would have both loans tested at the higher assessment rate and both rents shaded. The combined serviceability test is stricter than if they were purchasing their first property.

If you are considering turning your current home into an investment property and buying another to live in, the order in which you structure the transactions can affect your borrowing capacity and the interest rate you receive. Speaking with a broker before you commit to contracts helps you sequence the purchases correctly.

What Lenders Want to See in Your Application

Lenders assess investment loan applications on your income stability, existing debts, credit history, deposit source and the property itself. They will request payslips, tax returns if you are self-employed, bank statements showing savings history, and a rental appraisal or signed lease if the property is already tenanted.

The property's location, type and condition all matter. A weatherboard cottage in New Town close to the hospital and CBD will generally be viewed more favourably than a studio apartment in an area with high investor ownership and limited owner-occupier appeal. Lenders sometimes apply postcode overlays that restrict lending in certain areas or building types, particularly if they perceive oversupply risk.

Your application also needs to demonstrate that you can service the loan from your own income if the property sits vacant for an extended period. Lenders do not assume rental income is guaranteed, and if your personal income is insufficient to cover the mortgage at the assessment rate without any rent, the application may be declined or the loan amount reduced.

Capital Gains Tax and the Indexation Change from July Last Year

When you eventually sell an investment property, capital gains tax applies to the profit. For gains accruing up to 1 July last year, you receive a 50 per cent discount if you held the property for more than 12 months. For gains accruing after that date, the discount is replaced by cost base indexation and a 30 per cent minimum tax rate on the real gain.

If you bought a property in New Town before July last year and sell it in future, the gain is split. The portion of the gain that accrued before July last year is taxed under the old 50 per cent discount rules. The portion after that date is indexed for inflation and taxed at a minimum 30 per cent rate. For new builds purchased after 12 May, you can choose between the old discount method and the new indexation method when you sell.

This change affects your after-tax return and needs to be factored into your investment modelling, particularly if you plan to hold the property for the medium term and inflation erodes the nominal gain.

Refinancing Your Investment Loan

Once you own an investment property, you can refinance the loan to access a lower rate, release equity for further investment, or restructure the loan terms. Lenders reassess your serviceability at the time of refinancing using current income, current debts and current rental income.

If your circumstances have changed, such as reduced income, increased debt or a drop in rent, refinancing may be harder than the initial approval. Conversely, if you have paid down debt, increased your income or the property has increased in value, you may be able to access better loan terms or borrow additional funds against the equity.

Refinancing can also be used to shift from interest-only to principal and interest, or to split your loan between fixed and variable components to manage interest rate risk. Holding an investment loan on the wrong structure or at an uncompetitive rate costs you money every month, so reviewing your loan periodically makes sense.

Call one of our team or book an appointment at a time that works for you. We'll walk through your income, your deposit, the type of property you are considering and which lenders are most likely to support your application. We compare investment loan options from banks and lenders across Australia and structure the application to give you the clearest picture of what you can borrow and what it will cost.

Frequently Asked Questions