Smart ways to approach investment loan challenges

Property investors face a different set of challenges in 2026 than they did even two years ago.

The combination of debt-to-income limits, a higher serviceability buffer and changes to negative gearing treatment has reshaped how lenders assess investment loan applications. Investors purchasing established properties after May 2026 need to plan for how losses will be quarantined from other income, and those expanding portfolios need to understand how lenders measure total debt across all properties when applying the twenty per cent cap on high debt-to-income lending.

Debt-to-Income Limits and What They Mean for Kew Investors

Each lender can approve up to twenty per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. Total debt includes all investment and owner-occupied loans combined.

Consider a Kew-based buyer earning $150,000 annually who already holds $600,000 in home loan debt and seeks a further $400,000 for an investment property. The total debt would be $1,000,000 against $150,000 income, which is a ratio of 6.67. That application would fall within the twenty per cent bucket. If the lender has already allocated most of that bucket for the quarter, the application may be declined or deferred regardless of the borrower's capacity to service the loan at the test rate. This is particularly relevant in Kew, where many buyers are upgrading from smaller homes in neighbouring suburbs while holding onto their original property as a rental.

The limit applies separately to owner-occupier and investor lending, so it does not prevent all high-ratio lending. It does, however, create a capacity constraint that varies by lender and by quarter. Some smaller lenders may reach their cap earlier in the quarter, while others remain open for longer.

Serviceability Assessment at a 3.0 Percentage Point Buffer

Lenders assess your ability to service a loan at a rate that is at least three percentage points above the actual loan product rate. If you are applying for a variable rate investor loan currently priced at 6.30 per cent, the lender will assess serviceability at 9.30 per cent or higher.

For interest-only investment loans, which remain a common structure for investors, this means the repayment tested during assessment is significantly higher than the actual interest-only payment. Rental income is included in the assessment, but lenders apply a shading factor to account for vacancies and holding costs. Most lenders shade rental income by twenty to thirty per cent, depending on the property type and location.

Negative Gearing Changes from the 2027-28 Income Year

Losses from established residential investment properties purchased after 12 May 2026 can only be offset against income from other residential properties from the 2027-28 income year onward. Excess losses carry forward to future years and remain available to offset residential property income or capital gains on residential property.

If you purchased an established investment property in Kew or elsewhere after May 2026, you can still claim all deductible expenses, including interest, against rental income. The restriction applies only when those expenses exceed the income and create a net loss. That loss can no longer reduce your salary, business income or other assessable income outside the residential property category.

Properties held at 12 May 2026, including those under contract at that date, are grandfathered. Investors who settled on a Kew apartment in April 2026 retain full negative gearing treatment. Investors who exchanged contracts in early May 2026 but settled in June also retain that treatment, provided the contract was binding at 7:30pm AEST on 12 May.

New builds are exempt. An investor purchasing a newly constructed townhouse in Kew on vacant land can still offset losses from that property against all income. The exemption does not extend to knock-down rebuilds that do not increase the number of dwellings or to substantial renovations of existing properties.

Capital Gains Tax: Indexed Cost Base from 1 July 2027

From 1 July 2027, capital gains on investment properties are taxed using an indexed cost base rather than the fifty per cent discount for the portion of the gain accruing after that date. The cost base is adjusted for inflation using the Consumer Price Index, and a thirty per cent minimum tax rate applies to real gains for most taxpayers.

For a property purchased in 2026 and sold in 2030, the gain is split. The portion accruing from purchase to 30 June 2027 is taxed under the current fifty per cent discount rules. The portion accruing from 1 July 2027 to sale is indexed for inflation, and tax is payable on the real gain at your marginal rate, with a floor of thirty per cent.

Investors can choose between obtaining a market valuation as at 1 July 2027 or using an apportionment formula published by the Australian Taxation Office. New build properties remain eligible for the fifty per cent discount as an alternative, giving those investors a choice at the time of sale.

Deposit and Lenders Mortgage Insurance for Investment Loans

Most lenders require a twenty per cent deposit for investment property purchases. At an LVR above eighty per cent, Lenders Mortgage Insurance is charged to the borrower. The premium increases with the loan-to-value ratio and can add several thousand dollars to the upfront cost.

Some lenders offer no LMI or low LMI options for professionals in certain occupations, and a small number of lenders will lend up to ninety-five per cent for investment purposes where the borrower has a strong income and employment profile. These products have stricter serviceability requirements and are not available across all lender panels.

In our experience, Kew buyers extending their portfolio often use equity release from their owner-occupied home rather than saving a cash deposit for the investment property. This allows them to access a larger deposit without liquidating other assets, but it increases the total debt serviced and brings the debt-to-income ratio into closer focus during assessment.

Interest-Only Loans and When They Still Make Sense

Interest-only repayment terms remain available for investment loans, typically for a period of one to five years. The appeal is cash flow. Lower repayments during the interest-only period allow the investor to hold the property without funding a principal reduction from after-tax income.

Under the new negative gearing rules, interest-only structures do not change the deductibility calculation. Interest remains deductible whether the loan is interest-only or principal and interest. The difference is purely in the repayment amount and the cash flow position of the investor.

For investors purchasing new builds, the cash flow advantage of interest-only loans is preserved, and the ability to negatively gear against all income continues. For investors purchasing established properties after May 2026, interest-only loans still reduce the holding cost, but the benefit of offsetting losses against salary is removed from the 2027-28 year onward.

Portfolio Growth Under the Debt-to-Income Framework

Investors adding a second or third property face the cumulative effect of the debt-to-income assessment. A borrower with one investment property and an owner-occupied home may already be at or near the six-times threshold when seeking finance for a second investment property.

The ability to grow a portfolio now depends more heavily on increasing income, reducing existing debt or structuring loans in a way that maximises rental income contributions to serviceability. Some investors are choosing to pay down owner-occupied debt before applying for the next investment loan, or they are selecting investment properties in locations where rental yields are higher and more reliably documented.

What This Means for Investors Based in Kew

Kew sits within a tightly held market where most sales are to owner-occupiers and upgraders. Investment stock is limited, and rental yields in the suburb are typically lower than in outer or growth areas. Investors based in Kew who are purchasing locally need to account for that yield profile when structuring their loan application and projecting cash flow.

Alternatively, many Kew-based investors purchase investment properties in higher-yield suburbs while retaining their family home in Kew. In those cases, the debt-to-income calculation still applies across the combined borrowing, but the rental income is stronger and serviceability is correspondingly improved. That approach is common among professionals and business owners in the area who are building passive income over the medium term.

Call one of our team or book an appointment at a time that works for you. AXTON Finance works with clients across Kew to structure investment loan applications that account for the current lending framework and tax treatment.

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