Lenders decide how much you can borrow based on the risk they see in your situation, the property you want to buy, and the income that property will generate.
The loan amount approved for an investment property depends on three factors that work together: your ability to service the debt from rental income and your own earnings, the loan to value ratio based on the property's valuation, and the lender's view of the property type and location. When one factor looks higher risk, lenders adjust their approval by reducing the amount they'll lend or increasing the interest rate they'll charge. Knowing where your situation sits helps you choose properties that lenders view favourably and avoid months of applications that go nowhere.
How Lenders Calculate Serviceability for Investment Properties
Serviceability means proving you can afford the loan repayments even when things don't go perfectly. Lenders assume the property will sit vacant for part of the year and calculate repayments at a higher interest rate than the one you'll actually pay.
Consider someone looking at a unit in Glenorchy priced at $400,000 with rental income of $380 per week. The lender won't use that full $380 in their calculations. They'll apply a vacancy rate, typically around 5%, which reduces the usable rental income to $361 per week. Then they assess whether you can cover the loan repayments at a test rate that might be 3% higher than the actual variable interest rate. If you're borrowing $360,000 at a 6.5% variable rate, your repayments would be around $2,275 per month as principal and interest, but the lender tests you at 9.5%, which pushes the hypothetical repayment closer to $3,020. Your salary and any other rental income need to cover that higher figure, plus all your living costs and existing debts.
This calculation explains why two people with similar incomes get approved for very different loan amounts. The person with no debts, modest living expenses, and a property that generates strong rental income relative to its price will borrow more than someone with a car loan, high credit card limit, and a property in an area where rents don't cover much of the mortgage.
Loan to Value Ratio and What It Means for Your Deposit
The loan to value ratio, or LVR, measures how much you're borrowing compared to the property's value. An LVR of 80% means you're borrowing $320,000 to buy a $400,000 property, with the remaining $80,000 coming from your deposit and costs.
Most lenders cap investment property borrowing at 90% LVR, and many prefer to stay below 80%. If you borrow above 80%, you'll pay Lenders Mortgage Insurance, which protects the lender if you default. LMI on an investment property costs more than on an owner-occupied home because the lender views investment borrowing as higher risk. For a $360,000 loan on a $400,000 property at 90% LVR, LMI could add $10,000 to $15,000 to your upfront costs.
The deposit required isn't just 10% or 20% of the purchase price. You also need to cover stamp duty, which in Tasmania runs around 4% on a $400,000 property, plus conveyancing, building inspections, and any body corporate records if you're buying a unit. A Glenorchy buyer purchasing a $400,000 unit would need roughly $96,000 in savings for a 20% deposit scenario once all costs are included, or closer to $62,000 if borrowing at 90% LVR including LMI.
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How Property Type Affects Lender Decisions in Glenorchy
Not all properties get the same treatment. Lenders adjust their risk settings based on what you're buying and where it sits in the market.
Glenorchy has a mix of older houses, units, and newer townhouses, particularly around areas like Claremont and Berriedale. A three-bedroom house on a standard block will generally receive more favourable loan terms than a one-bedroom apartment in an older block. Lenders see houses as easier to sell if they need to recover their funds, and they're less concerned about oversupply. Units, particularly smaller ones, face tighter lending conditions. Some lenders reduce the maximum LVR for units to 80%, meaning you'd need a 20% deposit minimum. Others apply a lower valuation or decline the loan entirely if the unit is in a building with structural issues, low owner-occupier rates, or a history of unpaid body corporate fees.
One scenario we see regularly involves someone wanting to buy a studio or one-bedroom unit as their first investment because the entry price looks manageable. The property might be listed at $280,000 with rent of $280 per week. On paper, the numbers look workable. When the application goes in, the lender either declines it or approves a smaller amount than expected because they view the property as too hard to sell if needed. The buyer then has to either come up with a much larger deposit or look at a different property type. Starting with the property type that lenders prefer avoids that setback.
Understanding Interest Only Versus Principal and Interest Loans
Investment loans give you the choice between interest only repayments and principal and interest repayments. The option you pick changes your cash flow and your borrowing capacity.
With interest only, your repayments cover just the interest charged each month. On a $360,000 loan at 6.5%, that's around $1,950 per month. The loan balance stays at $360,000 for the interest only period, which lenders typically allow for up to five years. This keeps your monthly costs lower, freeing up cash for other investments or to manage periods where the property sits vacant. The downside is you're not building equity through loan repayments, only through any increase in the property's value. When the interest only period ends, the loan converts to principal and interest and your repayments jump to around $2,480 per month for the remaining term.
Principal and interest loans mean you pay down the debt from day one. Your repayments start higher at around $2,275 per month, but the loan balance drops steadily and you build equity faster. Lenders assess your serviceability slightly differently depending on which structure you choose, though both still get tested at a higher rate than you'll actually pay.
The structure that suits you depends on your property investment strategy. If you're planning to use equity from this property to buy another one within a few years, interest only might give you more flexibility. If this is your only investment property and you want to reduce debt over time, principal and interest makes more sense.
Fixed Rate Versus Variable Rate for Investment Borrowing
You can lock in a fixed interest rate for one to five years or stay on a variable rate that moves with the market. Each option carries different risks and benefits.
Fixed rates give you certainty. If you lock in at 6.2% for three years, your repayments won't change during that period even if the Reserve Bank increases rates. The risk is that rates might fall instead, leaving you locked into a higher rate than variable borrowers are paying. Fixed loans also restrict your flexibility. Most lenders limit extra repayments on fixed rate investment loans to around $10,000 per year, and if you sell the property or refinance before the fixed term ends, you'll pay break costs that can run into thousands of dollars.
Variable rates give you flexibility. You can make unlimited extra repayments, refinance without penalty, and access features like offset accounts or redraws. The risk is that your repayments increase if rates rise. Over the life of a long-term investment loan, rates will move up and down multiple times. Some borrowers split their loan, fixing part for stability and keeping part variable for flexibility.
Glenorchy's rental market tends to track with Hobart's broader trends, and vacancy rates in the area have remained relatively low in recent years. A stable rental market reduces the chance you'll face extended vacancy periods that make it harder to cover a variable rate loan if repayments increase.
Tax Deductions and Claimable Expenses You Can Use
Investment properties generate tax benefits that reduce your overall holding costs. The interest you pay on your investment loan is tax deductible. So are most of the ongoing costs associated with the property.
You can claim body corporate fees, council rates, landlord insurance, property management fees, repairs and maintenance, and depreciation on the building and fixtures. If you're paying $1,950 per month in interest only repayments, that's $23,400 per year you can claim as a deduction. Add in $3,000 for body corporate fees, $1,500 for council rates, $800 for insurance, $3,800 in property management at 10% of rent, and another $2,000 for depreciation, and your total claimable expenses might reach $34,500. At a marginal tax rate of 37%, that saves you roughly $12,765 in tax, which lowers your actual annual holding cost significantly.
Negative gearing benefits come into play when your expenses exceed your rental income. If your property generates $19,760 in rent but costs $34,500 to hold, you're running a $14,740 annual loss. That loss reduces your taxable income, giving you a tax refund that partially offsets the shortfall. The strategy only works if the property increases in value over time, eventually delivering a capital gain that outweighs the years of losses you carried.
Refinancing to Access Equity for Portfolio Growth
Once your property increases in value, you can refinance your investment loan to release equity and use it as a deposit on another property.
If you bought that Glenorchy unit for $400,000 with an $80,000 deposit and it's now worth $480,000 three years later, you've gained $80,000 in value. Your loan balance might have dropped to $350,000 if you've been paying principal and interest, giving you $130,000 in equity. Lenders will typically let you borrow up to 80% of the new value, which is $384,000. You already owe $350,000, so you could access $34,000 to use as a deposit on a second property. That's enough for a 10% deposit on a $340,000 property, though you'd still need to cover stamp duty and LMI separately.
Equity release is how property investors build portfolio growth without needing to save another full deposit from their income. The process works only if your first property performs well and if your income can service the additional debt. Lenders reassess your entire financial position when you apply to access equity, so any changes to your employment, income, or debts will affect the outcome.
Call one of our team or book an appointment at a time that works for you. We'll assess your situation, run the numbers with multiple lenders, and help you structure a loan that supports your goals without overextending your finances.
Frequently Asked Questions
How do lenders calculate rental income when assessing my investment loan?
Lenders reduce your rental income by a vacancy rate of around 5%, then test your ability to service the loan at an interest rate 3% higher than what you'll actually pay. This means a property renting for $380 per week is treated as $361 in their calculations, and your income must cover repayments based on a much higher test rate.
What deposit do I need for an investment property in Glenorchy?
Most lenders require a 20% deposit to avoid Lenders Mortgage Insurance, though some will lend at 90% LVR. For a $400,000 property, you'll need roughly $96,000 including stamp duty and costs at 20% deposit, or around $62,000 at 10% deposit plus LMI.
Are interest only repayments better for investment properties?
Interest only repayments reduce your monthly cost and free up cash flow, which suits investors planning to use equity for portfolio growth. However, you're not reducing the loan balance, and repayments increase significantly when the interest only period ends after typically five years.
Do all properties in Glenorchy get the same loan terms?
No, lenders view houses more favourably than units. Smaller units, particularly one-bedroom apartments, often face reduced maximum LVRs or stricter approval conditions because lenders see them as harder to sell if needed.
How can I use equity from my first investment property to buy a second one?
Once your property increases in value, you can refinance to access up to 80% of the new valuation. The difference between that amount and your current loan balance can be used as a deposit on another property, though you still need to cover stamp duty and other costs separately.
