Buying an Investment Property: How Lenders Assess Your Application Differently
Investment property finance operates under a different set of rules to owner-occupier lending. Rates are higher, rental income is assessed conservatively, and the structure of your loan has real implications for your cash flow and tax position.
Here is what you need to know before you apply.
How Rental Income is Treated
Lenders do not use the full gross rental income from a property when assessing your ability to service an investment loan. They apply a rental income shading factor, typically between 75 and 80 percent of expected gross weekly rent, to account for vacancy, property management fees, and maintenance costs.
On top of that, lenders stress-test your repayment capacity using a higher notional interest rate, known as the assessment rate or floor rate, which can be 2 to 3 percent above the actual rate you will pay. This further reduces the surplus income available to service the debt.
Interest-Only vs Principal and Interest for Investors
Many property investors opt for interest-only (IO) repayments during the early years of an investment loan. The reasons are straightforward:
• Lower monthly repayments improve cash flow during the holding period
• Interest costs on investment borrowings are generally tax-deductible, making IO the tax-effective portion of your repayment
• Principal repayments on investment loans do not provide a tax deduction, though they do reduce your loan balance
IO periods are typically capped at 5 years, after which the loan reverts to principal and interest. Plan for the higher repayments before that happens. Note that APRA limits the proportion of new IO lending that banks can write, so IO approval is not automatic. Lenders apply stricter assessment criteria to IO applications.
Investment Loan Rates vs Owner-Occupier Rates
Investment loans attract a rate premium over comparable owner-occupier products. The spread varies but is typically between 0.10 and 0.50 percent. On a $700,000 loan at a 0.30 percent premium, that is approximately $2,100 in additional interest per year.
If you hold both an owner-occupier and an investment loan, it is worth reviewing whether the rate structure across both remains competitive. Lenders often sharpen their pricing when they hold multiple products for the same client.
Portfolio Lending and Multiple Investment Properties
Once you hold multiple investment properties, each new application becomes more complex. Your existing mortgage commitments are counted as liabilities in every subsequent assessment, and some major banks apply very conservative stress tests to existing loans that significantly limit your future borrowing capacity.
Non-bank and specialist lenders often take a more practical approach to portfolio investors, particularly where the portfolio is cash flow positive. A mortgage broker with experience in portfolio lending can identify which lenders are likely to support your growth.
The structure of your investment loan (IO vs P&I, fixed vs variable, standalone vs cross-collateralised) should be determined before you apply, not after. Getting this wrong at the outset can be costly and difficult to unwind.
Frequently Asked Questions
Can I use equity in my existing home to fund an investment property deposit?
Yes. Accessible equity in your owner-occupier property is one of the most common ways investors fund a deposit. See Post 5 in this series for a detailed walkthrough of how equity release works.
Does negative gearing affect my borrowing capacity?
Yes. A negatively geared investment property means your rental income is lower than your investment loan repayments. Lenders treat that shortfall as an additional expense, which reduces your overall borrowing capacity for future purchases.
James Ryan specialises in investment property finance and can structure your loan to maximise cash flow and tax efficiency. Call 0466 669 328 or visit azurafinancial.com.au
This article provides general information only and does not constitute financial, legal, or tax advice. Readers should seek professional advice in relation to their individual circumstances. James Ryan | Australian Credit Representative Number 562584 | Authorised under Australian Credit Licence 389328.
