Lenders assess your investment loan on how well you could cope if things got harder, not just on how things look today. If you know how that test works, you can plan your application with confidence and fewer surprises.
This article is for Morningside buyers weighing up an investment property purchase and wondering how a lender will see the numbers. Morningside is an inner-east Brisbane suburb.
How Do Lenders Assess Risk on an Investment Loan?
Lenders assess investment loan risk by testing whether you could keep up repayments at a higher rate than the one you are actually offered. For banks, credit unions and building societies regulated by APRA, the rule is to assess new borrowers at a rate at least 3.0 percentage points above the loan product rate.
This buffer applies to those regulated lenders only. Non-bank lenders are not bound by it, though each lender still applies its own credit policy. The practical point is that your repayments on paper will look heavier than your real repayments. A good first step is to check your borrowing capacity so you know the likely ceiling before you fall for a property.
Lenders also look closely at your existing debts. They ask about balances, rates and remaining terms. For credit cards, they can use a notional repayment based on the card limit, not on what you owe. Closing unused cards before you apply can therefore matter.
How Is Rental Income Counted in Serviceability?
Lenders generally count only part of your expected rent. APRA's guidance says prudent policies apply a minimum 20 per cent haircut, so no more than 80 per cent of expected rent is counted.
The haircut allows for periods when the property sits empty. It is not a deduction for management fees or repairs, so those costs still need to fit within your budget. Lenders also tend to rely less on a rental appraisal than on actual rent received. Exactly what evidence each lender accepts varies, which is where a broker comparing lenders helps.
Does Interest Only Borrowing Reduce Risk?
Interest only lowers your repayments for a set period, but it does not increase how much you can borrow. For interest only loans, lenders are expected to test your ability to repay principal and interest over the remaining term, after the interest only period ends.
As an illustrative example at 6.75% p.a., take a 30-year loan with a 5-year interest only period. The lender would test you on principal and interest over the remaining 25 years. That repayment is higher than one spread over 30 years, so your maximum loan size is lower than on a standard principal and interest loan.
The trade-off is that your balance does not fall during the interest only period. You owe the same amount at the end as at the start, and the higher repayments still arrive later. Interest is tax deductible on both structures, but only the interest portion of a principal and interest repayment is deductible. Speak with your accountant about how that applies to you.
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Why Loan to Value Ratio Matters for Investors
Your loan to value ratio (LVR) is the loan amount divided by the property value, and 80 per cent is the usual point above which Lenders Mortgage Insurance (LMI) is generally required. It is not a legal borrowing limit, and lenders can approve higher LVRs with their own approval and the insurer's.
The cost of going above 80 per cent is the LMI premium, which the borrower pays. The amount depends on the loan size and LVR. Some lenders also treat investment loans differently from owner-occupier loans. If you are weighing up the options, our page on no LMI loans explains the alternatives and their trade-offs.
Offset account balances do not reduce the loan amount when LVR is calculated. A large offset balance helps your interest costs, but it will not change your LVR.
Worked Example: Testing an Investor's Numbers
A buyer in Morningside with a stable salary wants to buy a rental and has two credit cards with high limits they rarely use. Their first application attempt shows a lower borrowing result than they expected.
The cause is the card limits. The lender applies a notional repayment based on the limit, not the balance, which reduces the amount they can service. The solution is to cancel one card and reduce the limit on the other before applying. The lender now counts a smaller commitment, and the buyer's assessed capacity improves. They also keep a cash buffer outside the loan so a few weeks of vacancy would not strain their budget.
The outcome is a stronger application that reflects their real position. The buyer still accepts the trade-off that a lower card limit means less spare credit in an emergency.
Tax Changes That Affect Investment Risk
Negative gearing rules now depend on when you acquire the property. Losses on residential investment properties held at 7:30pm AEST on 12 May 2026 continue to be deductible against other income, as do losses from eligible new builds.
From the 2027-28 income year, net rental losses on established residential properties acquired after that time are deductible only against other residential property income, with excess losses carried forward. The change does not affect whether interest is deductible, but it changes how a loss can be used. Capital gains tax is also changing from 1 July 2027, when the 50 per cent discount is replaced by cost base indexation and a 30 per cent minimum tax rate on gains accruing from that date.
If your plan relies on a rental loss offsetting your salary, that reliance is a real risk for a new established purchase. Please get advice from your accountant before you commit.
Can You Use Equity Without Raising Your Risk?
Using equity from an existing property to fund a deposit raises your total debt, so it increases your risk. Borrowing against equity does not make the interest deductible by itself, as the deduction depends on how you use the money.
For example, funds used to buy an investment can produce deductible interest, while funds used for private spending cannot. Mixing the two can complicate your claim. Each lender sets its own caps on equity release, and valuation requirements depend on the individual lender. If you already hold a loan, a loan health check or a look at refinancing can show where you stand before you apply.
What If Repayments Become Hard to Meet?
If you cannot meet repayments on a regulated loan held in your own name, you can notify your lender of hardship, verbally or in writing. The lender then has 21 days to ask for more information, and must reply with either a changed arrangement or a written refusal with contact details for AFCA.
Credit provided wholly or mainly for business purposes, or to a company, is generally outside these rules. Knowing this before you borrow is part of assessing your own risk.
Call one of our team or book an appointment at a time that works for you through our investment loans page, and we will walk through your numbers with you.
Frequently Asked Questions
How do lenders test an investment loan application?
APRA-regulated lenders must assess new borrowers at a rate at least 3.0 percentage points above the loan rate. They also review your existing debts and count only part of your expected rental income.
How much rent do lenders count?
APRA's guidance says prudent policies count no more than 80 per cent of expected rent. Each lender decides what evidence of rent it accepts.
Does interest only let me borrow more?
No. Lenders test interest only loans on principal and interest repayments over the remaining term, so your maximum loan is lower than on an equivalent principal and interest loan.
Is 80 per cent LVR the most I can borrow?
No. It is the point above which LMI is generally required. Higher borrowing needs approval from the lender and the insurer, and the LMI premium is paid by the borrower.
