Investment property loans

What actually decides whether you can buy

Two things: serviceability and deposit. Property selection matters enormously to your returns, and not at all to whether the bank says yes.

Serviceability

The lender tests whether you can afford the new loan alongside everything you already have, at an assessment rate higher than the one you will pay.

Rental income helps — but it is shaded. Most lenders count a proportion, often around 70 to 80%, to allow for vacancy, agent fees, rates, insurance and maintenance. That shading is the single biggest reason people are surprised by how little their borrowing capacity increases when they add a rental.

Existing debt hurts more than people expect. Lenders assess your existing home loan at their assessment rate too, not at the rate you actually pay.

Deposit

Usually funded one of two ways:

• Cash, or
• Equity released from a property you already own

Equity release is the common route. If your home is worth more than you owe, you increase the loan against it and use the released funds as the deposit on the investment. Lenders will generally go to 80% of value without triggering LMI.

The valuation drives everything, and lenders genuinely differ — the same property can be valued materially differently by two lenders. That difference can be the difference between having a deposit and not.

Structure matters more than rate

This is where a lot of first-time investors quietly limit themselves.

Keep loans separate

Where you release equity from your home to fund an investment deposit, it is generally cleaner to take that as a separate split rather than blending it into the existing home loan.

Why: the interest on borrowings used to acquire an income-producing asset is treated differently from the interest on your own home. Keeping the borrowings physically separate makes that distinction clean and easy to evidence. Blending them makes it messy, and the mess is yours to sort out at tax time every year afterwards.

This is a tax matter as well as a lending one — talk to your accountant about your situation. What we can do is make sure the loan structure does not make their job impossible.

Avoid cross-collateralisation unless there is a reason

Cross-collateralisation is where one lender holds security over multiple properties for the same loans.

It sometimes makes an approval easier. It also means:

• Selling one property involves the lender’s consent across the whole arrangement
• Refinancing one means unwinding the structure
• Releasing equity from one is assessed against all of them
• You are, in practice, locked to one lender

It is far easier to avoid at the start than to untangle in three years. If you already have it, untangling is usually worth doing at the next refinance.

Think about the next purchase now

If you might buy a second investment property, the structure of the first one determines whether that is realistic. Cross-collateralised loans, an inflexible lender, or having used your entire equity buffer all narrow what comes next.

Structure is worth getting right the first time. It is far cheaper to set up well than to untangle later. Book a free chat and we will map it against what you are planning next.

Interest-only versus principal and interest

Interest-only lowers the monthly cost and keeps the loan balance — and therefore the deductible interest — from reducing.

It also means:

• You are not building equity through repayments, only through capital growth
• Rates on interest-only are typically higher
• Interest-only periods end, and the repayment step-up at that point is significant
• Lenders assess interest-only loans over the remaining principal-and-interest term, which reduces borrowing capacity

Whether it suits you depends on your income, your tax position and your strategy. It is not automatically the right answer for an investment property, despite being treated that way.

The costs people underestimate

Rental income does not cover as much as the headline yield suggests:

• Property management — typically a percentage of rent plus letting fees
• Council rates and water
• Landlord insurance
• Owners corporation fees, for apartments and townhouses — frequently substantial
• Maintenance and repairs, which are lumpy and inconvenient
• Vacancy. Even a few weeks between tenants matters
• Land tax, once your landholdings pass the threshold. Often overlooked on a first purchase and unwelcome when it arrives

Run the numbers on what you will actually contribute out of pocket each month, in the years when something breaks — not on the year where nothing does.

Buying in a growth corridor

Investors look closely at Melbourne’s north because entry prices are lower than established suburbs and rental demand is real.

Worth understanding honestly:

• New estate stock is plentiful, which supports supply and can moderate both rent growth and capital growth relative to areas where supply is constrained
• Comparable sales are thin for valuation purposes in newly-released areas, which raises valuation risk
• Land tax and holding costs apply regardless of what the property does
• New builds attract different depreciation treatment than established properties — again, an accountant question

We can tell you what you can borrow and how to structure it. Whether a specific property is a good investment is a different question, and one you should be taking to people who assess property for a living.

What to do first

1. Establish your equity position — get a realistic view of what your current property is worth and what can be released
2. Establish your borrowing capacity with rental income shaded the way lenders actually shade it
3. Decide the structure before you apply, not after
4. Talk to your accountant about the tax treatment of how it is set up
5. Then look at property