Beginner's Guide to Property Investment Loans

An investment loan is a home loan secured against property that you intend to rent out rather than live in. Lenders assess these loans differently to owner-occupier finance, typically requiring higher deposits and charging different rates, because rental properties carry additional risk from vacancy periods and tenant turnover.

Bentleigh's proximity to Southland Shopping Centre and the Frankston railway line makes it a consistent performer for investors targeting long-term tenants, particularly young families and professionals working in the CBD. The suburb's median rental yield sits above the metropolitan average, and the mix of post-war brick units and renovated period homes provides entry points across different price brackets.

How Lenders Assess Investment Loan Applications

Lenders assess investment loan applications using your total income minus all committed expenses, including the proposed investment property loan repayment. Rental income is included, but most lenders apply a discount of 20 to 30 per cent to account for vacancy periods, property management fees and maintenance costs. The loan must be serviceable at the product rate plus a buffer of 3.0 percentage points, meaning a variable rate loan priced at 6.2 per cent will be tested at 9.2 per cent.

Consider a buyer who earns $95,000 annually and already owns an owner-occupied property in Bentleigh with repayments of $2,400 per month. They want to borrow $520,000 to purchase a two-bedroom unit in nearby Moorabbin, with an expected rental return of $480 per week. The lender will assess serviceability using $480 less 20 per cent, which leaves $384 per week, or roughly $1,664 per month. That adjusted rental income is added to the buyer's salary, then all debts and living expenses are deducted. The investment loan repayment is tested at the buffered rate, not the actual rate. If the residual income after all deductions is insufficient, the loan will be declined or the borrowing capacity reduced, even where the rental income comfortably covers the actual repayment.

Deposit and Equity Requirements for Investment Property Finance

Most lenders require a minimum 10 per cent deposit for investment loans, though some will lend at higher loan-to-value ratios with Lenders Mortgage Insurance. Borrowing above 80 per cent LVR on an investment property attracts a significantly higher LMI premium than the equivalent owner-occupier loan, and some lenders cap investor LVRs at 90 or 95 per cent regardless of insurance. Deposits can be made up of genuine savings, equity in an existing property, or a combination of both.

Using equity from your Bentleigh home to fund the deposit on a second property allows you to retain your cash for other costs such as stamp duty, conveyancing and building inspections. Equity is calculated as the current property value minus the outstanding loan balance. Lenders will typically allow you to borrow against up to 80 per cent of the property value without requiring LMI, meaning the usable equity is 80 per cent of the value minus what you owe. If your Bentleigh property has increased in value and your loan balance has reduced, that equity can be accessed through a refinance or top-up and redirected as a deposit on the investment purchase.

Interest Only Versus Principal and Interest Repayments

Interest only repayments mean you pay only the interest component of the loan each month, without reducing the principal balance. Principal and interest repayments include both interest and a portion of the loan balance, which reduces the debt over time. Most lenders allow interest only periods of one to five years on investment loans, after which the loan reverts to principal and interest unless you apply for an extension.

Interest only repayments are lower than principal and interest repayments, which improves cash flow during the holding period. Under current tax settings, interest on borrowings used to acquire or hold a rental property is deductible against assessable income. Because principal repayments are not deductible, many investors structure investment loans as interest only and direct surplus income toward their non-deductible owner-occupier debt instead. From the 2027-28 income year, losses on established residential investment properties acquired after 12 May 2026 can only be deducted against other residential property income, not salary or wages, unless the property is an eligible new build. Properties held before that date remain fully deductible under grandfathering provisions.

Variable Rate or Fixed Rate Investment Loans

Variable rate loans allow the interest rate to move up or down in line with lender pricing decisions, which typically follow Reserve Bank movements and funding cost changes. Fixed rate loans lock the interest rate for a set period, usually one to five years. Variable rates on investment loans are generally higher than variable rates on owner-occupier loans for the same borrower, and the same pattern applies to fixed rates.

Variable rate loans offer flexibility to make extra repayments, redraw funds and access offset accounts without penalty. Fixed rate loans typically restrict extra repayments to a capped amount per year and charge break costs if you repay the loan or refinance before the fixed term ends. Investors who expect to sell or refinance within a few years, or who want the option to pay down debt using rental income or other cash flow, tend to favour variable rate structures. Investors prioritising repayment certainty during a volatile rate cycle may fix part or all of the loan, accepting the trade-off in flexibility.

Tax Deductions and Claimable Expenses on Investment Property Loans

Interest on borrowings used to purchase or hold residential rental property is deductible to the extent the property is rented or genuinely available for rent. Other claimable expenses include council rates, building and landlord insurance, property management fees, repairs and maintenance, strata levies for units, and depreciation on plant and equipment and building capital works. Borrowing costs such as loan establishment fees, valuation fees and mortgage broker fees can generally be claimed over five years or the loan term, whichever is shorter.

Stamp duty on the property purchase and the cost of capital improvements such as renovations or extensions are not immediately deductible. Instead, they form part of the property's cost base for capital gains tax purposes when you sell. LMI premiums are deductible in the year incurred if the loan is for investment purposes, or over five years if you choose to spread the deduction. Record-keeping is required for all claimed expenses, and apportionment applies where a property is used for both private and income-producing purposes or is vacant for part of the year.

Debt-to-Income Limits and Borrowing Capacity for Property Investors

From 1 February 2026, lenders may approve up to 20 per cent of new investment loans to borrowers with a total debt-to-income ratio of six times gross annual income or higher. Borrowers below that threshold are not affected. The limit applies to total debt across all loans, including owner-occupier mortgages, investment loans, personal loans and credit cards, measured against the borrower's gross income before tax.

In practice, most investors in Bentleigh who already own an owner-occupied property and are adding a second property will exceed a DTI of six if their combined borrowing is more than six times their household income. Lenders operating close to the 20 per cent quarterly cap may tighten serviceability settings or decline applications that would otherwise meet credit policy. This does not prevent investment lending, but it does mean that investors with higher debt levels relative to income may face more limited investment loan options or be required to provide a larger deposit to bring the DTI ratio below six.

How Rental Income Is Treated in Serviceability Calculations

Lenders include rental income in serviceability assessments, but apply a discount to account for vacancy, management and maintenance. The discount varies by lender and typically ranges from 20 to 30 per cent of the gross rent. Some lenders apply a higher discount for properties in regional areas or for short-term rental arrangements.

A two-bedroom unit in Bentleigh East generating $460 per week in rent will be assessed at $368 per week after a 20 per cent reduction, or roughly $1,595 per month. That adjusted figure is added to your other income and used to offset the proposed loan repayment and all other commitments. If the property has not yet settled or is currently vacant, lenders will accept a rental appraisal from a licensed property manager as evidence of expected income. Where you already own investment properties, the existing rental income and loan repayments are both included in the assessment.

Call one of our team or book an appointment at a time that works for you to discuss which loan structure suits your circumstances and how to position your application for approval.

Frequently Asked Questions