Lenders assess your ability to repay an investment loan at an interest rate three percentage points above the actual product rate, and most now cap lending to borrowers with debt six times or more of their income.
Those two requirements alone knock out more applications than any other factor. Yet most investors who contact us have built their deposit, chosen a property and started calculating rental yield without checking whether they can actually service the loan under current rules.
Underestimating the Serviceability Buffer
Every lender must test your ability to repay at a rate at least three percentage points above the loan product rate. If the variable rate on offer is 6.2 per cent, your income and expenses are assessed as though the rate were 9.2 per cent. The buffer has been in place since late 2021 and applies to new borrowers only.
Consider a borrower earning $110,000 a year who wants to borrow $500,000 for a rental property returning $450 per week. The loan repayment at the actual rate might sit comfortably within their budget, but the lender calculates repayments at the buffered rate. Once you add existing commitments, childcare costs and a realistic living expense benchmark, the servicing capacity can fall short by $50,000 or more. The application is declined not because the investor cannot afford the loan, but because the lender cannot approve it under prudential rules.
If your borrowing sits close to the edge, a small change in the buffer or your income can shift the outcome. Running the numbers with a broker who has access to different lender policies gives you a realistic picture before you commit to a contract.
Ignoring the Debt-to-Income Lending Limit
From February this year, lenders can extend no more than 20 per cent of new investor loans to borrowers with total debt six times or more of their gross income. The limit applies separately to each lender and is measured quarterly, so timing and lender choice both matter.
If your income is $120,000 and your total borrowings including the new investment loan would be $750,000, your debt-to-income ratio is 6.25. You fall into the restricted portion of the lender's allocation. If that lender has already written 20 per cent of its investor loans to high-DTI borrowers in the current quarter, your application will be declined regardless of your deposit, rental income or credit history. Another lender with capacity remaining in the same quarter may approve the same loan.
Ready to get started?
Book a chat with a Finance & Mortgage Broker at Zaid Finance Co today.
The limit does not apply to non-bank lenders, but those lenders typically price higher and may still apply their own serviceability overlays. Knowing which lenders have capacity and how your DTI ratio compares to the threshold can mean the difference between approval and refusal on the same application.
Mixing Up Interest Deductibility and Loan Purpose
Interest on an investment loan is deductible only to the extent the borrowed funds are used to acquire or hold an income-producing property. If you redraw funds from the loan to renovate your own home or pay for a holiday, the interest on that portion is not deductible, even though the loan is secured against the rental property.
In one scenario we see regularly, an investor borrows $600,000 to purchase a rental property, then redraws $40,000 two years later to install a new kitchen in their main residence. The interest on $40,000 is now private and non-deductible. The lender does not separate the loan, and the investor continues paying interest on the full amount without realising they have diluted their tax benefit. Keeping the investment loan untouched and using a separate facility for private expenses preserves the deduction and makes tax time far simpler.
If you are refinancing an existing investment loan, the same principle applies. Borrowed funds must continue to be used for investment purposes to maintain deductibility. Topping up a refinance to fund personal expenses creates a mixed-purpose loan that requires apportionment.
Overestimating Rental Income in Your Application
Lenders do not accept the advertised rent as your income. Most apply a shading factor, often 20 per cent, to allow for vacancy, maintenance periods and unpaid rent. A property returning $500 per week is treated as $400 per week in the serviceability calculation.
If you have based your borrowing capacity on the full advertised rent, the actual amount the lender will accept may leave you $30,000 to $50,000 short of what you need. The shortfall becomes larger when rental income is your primary offset against the loan repayment, particularly if you are salary packaging, on parental leave or hold other investment debt.
Some lenders accept a lower shading rate if you can provide a signed lease and a strong rental history for the area, but the 20 per cent figure remains the common starting point. Always calculate your borrowing capacity using the shaded income, not the gross figure.
Assuming You Can Refinance Before Negative Gearing Changes Take Effect
Properties acquired after 12 May last year are subject to the new negative gearing rules from the 2027-28 income year onward. Losses on those properties can only be offset against income from other residential properties, not against your salary. Losses can be carried forward, but they do not reduce your tax in the year they are incurred unless you have other residential property income to offset them against.
If you purchased an established investment property in June this year expecting to negatively gear it against your wage, you have until 30 June next year to do so under the old rules. From 1 July next year, any loss is quarantined. Refinancing the loan does not change the tax treatment because the rule applies to the property acquisition date, not the loan date.
New builds remain exempt. If the property you purchased was an eligible new dwelling, losses continue to be deductible against all income indefinitely. The definition is narrow and includes only dwellings constructed on previously vacant land or developments that increase the total number of dwellings. A knock-down rebuild that replaces one dwelling with one new dwelling does not qualify.
Understanding which properties are caught and how the transition works is necessary before you sign a contract. Relying on outdated tax assumptions can leave you carrying a loss with no immediate tax benefit and a holding cost higher than you planned. If your investment strategy depends on negative gearing to remain cashflow neutral, check the acquisition date and the property type before you proceed. You can find more detail on structuring your investment borrowing on our investment loans page.
Choosing Interest-Only Without Understanding the Capital Requirement
Interest-only repayments lower your monthly outgoings and can improve cashflow in the early years of ownership, but lenders classify interest-only loans differently under the capital adequacy rules. An interest-only period longer than five years on a loan above 80 per cent LVR is treated as non-standard, which increases the bank's capital requirement and usually results in a higher interest rate or a declined application.
Most lenders will approve a five-year interest-only period on an investment loan without additional pricing, provided your LVR is 80 per cent or below. If you are borrowing above 80 per cent and requesting interest-only, expect either a higher rate or a requirement to switch to principal-and-interest repayments sooner than you planned.
Interest-only also means your loan balance does not reduce. If property values fall or rental income drops, you have no equity buffer from repayments. When the interest-only period ends, your repayment jumps to cover both principal and interest, often by 30 to 40 per cent. Planning for that increase now, rather than hoping to refinance later, keeps your investment sustainable. More information on repayment structures is available through our mortgage repayment calculator.
Overlooking Lenders Mortgage Insurance on Higher LVR Loans
Lenders Mortgage Insurance is required on most investment loans where the LVR exceeds 80 per cent. The premium is calculated on a sliding scale based on your loan amount and LVR, and it is paid by you, not the lender. On a $500,000 loan at 90 per cent LVR, the LMI premium can sit between $15,000 and $20,000 depending on the insurer and your circumstances.
The premium is usually capitalised into the loan, which means you pay interest on it for the life of the loan. It is not refundable if you refinance or sell early, and it is not a claimable tax deduction for investors because it is a capital cost related to the loan, not the property.
If you are borrowing at 85 per cent LVR or higher, factor the LMI cost into your total borrowing and your upfront cash requirement. Some lenders waive LMI for certain professions or offer discounted premiums for smaller lending increases, but those exceptions are narrow. Most investors pay the full rate. Waiting until you have a 20 per cent deposit removes the LMI cost entirely and improves your interest rate, your serviceability outcome and your approval chance.
Using Equity Without Checking How It Affects Your New Loan
Releasing equity from your home to fund an investment deposit is common, but the way you structure the release determines whether the interest remains deductible. If you increase the loan on your home and transfer the funds to your offset or redraw before using them for the investment, you risk blurring the purpose. If you then dip into that account for private expenses, the deductibility is lost.
The cleanest structure is a separate split loan or a standalone equity loan with funds drawn at settlement and used only for the investment purchase and associated costs. That keeps the purpose clear, the interest fully deductible, and the records simple.
Equity release also increases your total debt, which feeds into the debt-to-income calculation and reduces your serviceability for the new loan. If you are already close to the six-times limit, pulling equity from your home can push your DTI ratio over the threshold and trigger a decline. Running the numbers before you restructure your home loan prevents that outcome. Our refinancing page covers equity release and loan splitting in more detail.
Failing to Compare Investor Interest Rates Across Lenders
Investor interest rates are higher than owner-occupier rates at the same LVR, often by 0.3 to 0.6 percentage points depending on the lender and loan features. The difference exists because investment loans are classified as higher risk under the capital adequacy rules and attract higher risk weights.
Not all lenders price investment loans the same way. Some apply a flat loading to the equivalent owner-occupier rate, others tier their pricing by LVR or loan amount, and a few offer discounted investor rates to borrowers with multiple products or large deposits. A 0.4 percentage point difference on a $500,000 loan adds up to roughly $2,000 per year in interest.
Checking rates from your existing lender without comparing other options leaves money on the table. Lenders also vary in how they assess rental income, apply serviceability buffers, and handle offset accounts on investment loans. What looks like a lower rate on paper may come with restrictions that reduce flexibility or increase costs elsewhere. Our brokers have access to investor loan products from banks and lenders across Australia, and we compare both rate and features to find the structure that fits your strategy. You can start that conversation by visiting our investment loans page or reaching out directly.
Call one of our team or book an appointment at a time that works for you.
