A lender mainly assesses your overall capacity to repay an investment loan. They also count a shaded portion of rent, no more than 80% of expected rent, alongside your other income. Knowing how that assessment works helps you choose a realistic budget before you make an offer.
For investors in Inverloch, that matters because each lender treats rental income, existing debts and deposit differently, so it pays to check local rental conditions before you buy. A broker can compare those policies for you before anything is lodged.
How Do Lenders Assess an Investment Loan Application?
Lenders test whether you could still afford the loan if rates rose. Banks, credit unions and building societies regulated by APRA must assess new borrowers at an interest rate at least 3.0 percentage points above the loan's actual rate.
This buffer applies to investment loans as well as home loans. It means a loan that looks comfortable today is tested against a much higher repayment. Your other debts count too. Lenders ask about existing loans, their balances and remaining terms. For credit cards, they commonly assess repayments on the card limit, not on what you owe. Reducing unused limits before you apply can lift the amount a lender is willing to offer. The trade-off is that closing a card removes a handy backup source of funds.
Non-bank lenders are not bound by the same buffer, though they set their own policies. Our borrowing capacity page explains how we approach this test.
How Much Rental Income Will a Lender Count?
APRA expects lenders to count no more than 80% of expected rent, which allows for periods without a tenant. Each lender then sets its own rules on what rental evidence it accepts.
The 20% haircut is for vacancy only. It does not cover agent fees, repairs, rates or insurance, so those costs still come out of your budget. Lenders also tend to place less weight on a rental appraisal for a property you are yet to buy than on actual rent received. Whether a lender accepts an appraisal for a new purchase differs between lenders, so ask before choosing one.
Does Interest Only Help You Borrow More?
No. An interest-only feature does not increase your borrowing capacity. APRA expects lenders to assess interest-only loans on principal and interest repayments over the remaining term once the interest-only period ends.
As an example, a 30-year loan with a 5-year interest-only period is assessed on repayments over the remaining 25 years. That produces a higher assessed repayment than a 30-year assessment, so the maximum loan can be lower.
Interest-only lowers your repayments for a set period, which can help cash flow. The cost is that your balance does not fall during that time, and repayments rise when the period ends. Interest is deductible under either structure, but the principal part of a principal and interest repayment is not. Speak with your accountant about how this applies to you.
Illustrative Repayment Example at 6.75%
At an illustrative rate of 6.75% p.a., a $500,000 loan costs about $2,812 a month in interest only. The same loan on principal and interest over 30 years costs about $3,243 a month.
Consider an investor who borrows $500,000 on interest only for five years, then moves to principal and interest. Compared with a 30-year principal and interest loan ($3,243), interest only saves about $431 a month for the five years ($3,243 vs $2,812). Repayments after the switch are calculated over 25 years, not 30. At the same 6.75% illustrative rate, that is about $3,455 a month, so repayments rise by about $643 a month, from $2,812 to $3,455. This investor would need to plan for that increase.
These figures are illustrative only. Actual rates vary with your deposit, the lender and the loan features. Use a calculator, or ask us, to test your own numbers.
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What Deposit and LVR Do You Need for an Investment Loan?
Most lenders want a deposit of at least 20% of the property value to avoid Lenders Mortgage Insurance. That 20% is a typical lender policy, not a legal rule.
Borrowing above an 80% loan to value ratio (LVR) needs approval from both the lender and the mortgage insurer. The premium is paid by you and rises with the loan amount and LVR. A larger deposit reduces or removes that cost, but ties up more of your savings. Offset account balances do not reduce the loan amount for the purposes of LVR.
If you already own a home, you may be able to use equity as part of the deposit. Any money borrowed against that equity increases your total debt. Interest is only deductible to the extent the funds are used to produce rental income. Using some of it for personal spending changes that. Get tax advice from your accountant.
How Do Recent Tax Changes Affect Your Investment Property Plans?
Negative gearing rules now depend on when you acquire the property and whether it is established or an eligible new build. Properties held at 7:30pm AEST on 12 May 2026 keep the current treatment.
From the 2027-28 income year, net rental losses on established residential properties bought after that time can only be used against other residential property income, including residential capital gains. Excess losses carry forward. Eligible new builds can still be deducted against all income. Different capital gains rules also start from 1 July 2027, replacing the 50% discount with indexation and a 30% minimum tax rate on gains from that date.
These changes affect how a loss can be used, not whether interest is deductible. They matter for your cash flow planning, because a loss you cannot offset against your salary has a real cost. Confirm how they apply to your situation with your accountant before you commit to a purchase.
Should You Refinance or Apply for a New Loan?
If you already own a property, refinancing or restructuring existing debt can sometimes release funds for the next purchase. Whether it suits depends on your lender's policies and costs.
Costs can include discharge fees and valuation fees, which vary between lenders. If your existing loan is fixed, break costs may apply. Our refinancing team can compare your options, and a loan health check is a good first step if your current loan has not been reviewed lately. If a fixed term is ending soon, see our fixed rate expiry page.
To see the full range of lending options, visit our investment loans page. Our Inverloch mortgage broker service gives local investors direct access to lenders across Australia.
Call one of our team or book an appointment at a time that works for you, and we will map out your investment loan application before you make an offer.
Frequently Asked Questions
How do lenders assess an investment loan application?
Banks and other APRA-regulated lenders test whether you could afford the loan at a rate at least 3.0 percentage points above the actual rate. They also review your existing debts and count no more than 80% of expected rent.
Does an interest-only investment loan increase how much I can borrow?
No. Lenders assess interest-only loans on principal and interest repayments over the remaining term after the interest-only period, so the maximum loan can be lower. Interest only mainly changes your repayments in the early years.
Do I need a 20% deposit for an investment property?
Lenders generally require Lenders Mortgage Insurance when the LVR is above 80%. A deposit of 20% is lender policy, not a legal maximum or minimum, and each lender sets its own limits.
Is investment loan interest tax deductible?
Interest on money borrowed to buy or hold a rental property is generally deductible to the extent the property is rented or available for rent. The principal part of a repayment is not deductible, so check your position with your accountant.
