Smart ways to approach investment property loans

Investment finance now carries a different set of decisions than it did twelve months ago.

Australian investors purchasing established dwellings after 1 July 2027 will no longer be able to offset rental losses against salary or other income unless they meet specific criteria. That change directly affects how you structure your loan, how much deposit you put down, and whether refinancing an existing property makes sense before adding another.

How the quarantining of rental losses affects your borrowing capacity

Lenders assess your serviceability using your current income, liabilities, and living expenses, then apply a buffer of three percentage points above the product rate. Rental income is included, but lenders apply a haircut between 20 and 30 per cent to account for vacancy and maintenance. From 1 July 2027, if you're purchasing an established dwelling in Burwood, any anticipated rental loss on that property cannot reduce your taxable income. Lenders may adjust their debt serviceability calculations to reflect that structural change, which could lower the amount you can borrow compared to the same scenario assessed under the current rules.

Consider a buyer acquiring a two-bedroom apartment on Burwood Highway. Rental yield in the suburb sits around 3.5 to 4 per cent, which means a property held at 80 per cent loan to value ratio will likely generate a negative cash flow when you include body corporate fees, council rates, and landlord insurance. Under the new rules, that loss stays quarantined unless you have other residential rental income or sell the property. The quarantine doesn't make the property unviable, but it does require you to service the shortfall from post-tax income without any deduction to reduce that burden.

Why Burwood remains attractive to investors despite the structural change

Burwood sits 17 kilometres east of Melbourne's CBD, with direct access via tram and the Belgrave and Lilydale train lines from Burwood Station. The suburb has a strong concentration of schools, including Methodist Ladies' College, Deakin University's Burwood campus, and several well-regarded primary and secondary schools. That combination of transport and education infrastructure drives consistent rental demand, particularly from young professionals, students, and families.

The median unit price has historically sat below comparable suburbs closer to the city, which means you can enter the market with a lower deposit in dollar terms while still targeting tenants who value proximity to work and study. Vacancy in the area tends to run lower than the metropolitan average due to the Deakin campus and the commercial precinct along Burwood Highway. Properties within walking distance of the station or the university typically lease within two to three weeks.

Structuring your deposit and understanding Lenders Mortgage Insurance

Most lenders will approve investment property loans at a loan to value ratio of up to 90 per cent, but anything above 80 per cent will attract Lenders Mortgage Insurance. LMI is a one-off premium that protects the lender if you default, and it's calculated based on the loan amount, the LVR, and the postcode. For an established unit in Burwood at 85 per cent LVR, the premium could range from $8,000 to $15,000 depending on the lender and the loan amount. That cost can be capitalised into the loan, but doing so increases your borrowing and your ongoing repayments.

If you already own property, you may be able to use equity from your existing home to fund the deposit and avoid LMI entirely. A buyer with $200,000 in available equity could release that equity to cover a 20 per cent deposit and settlement costs, then structure the new loan at 80 per cent LVR without needing any cash savings. The advantage is that you preserve liquidity and avoid the LMI premium. The trade-off is that you increase the debt against your home, which means your overall exposure rises and you need to service two loans from your income and the rental return.

Choosing between variable and fixed rates for investment lending

Investors typically favour variable rates because they offer offset account functionality and the ability to make extra repayments without penalty. An offset account lets you park cash against the loan balance, which reduces the daily interest calculation without locking that money away. If you're holding the property for capital growth and expect to sell within five to ten years, having access to your funds and the flexibility to pay down the loan early can outweigh the certainty of a fixed rate.

Fixed rates remove the uncertainty around repayment amounts for the fixed period, but they come with restrictions. Most fixed-rate products cap extra repayments at $10,000 to $30,000 per year, and you cannot link an offset account. If you sell the property or refinance during the fixed term, you may incur break costs, which are calculated based on the difference between your fixed rate and the wholesale rate the lender can earn by redeploying that money. In a falling rate environment, those costs can reach tens of thousands of dollars.

Some investors split their loan, fixing a portion for certainty and leaving the remainder on a variable rate with an offset. That structure gives you partial protection against rate rises while maintaining flexibility on the variable portion. The downside is that you're managing two loan accounts, and the fixed portion still carries break cost risk if your circumstances change.

Interest-only repayments and their role in cash flow management

An interest-only loan structure is common for investment properties because it reduces the monthly repayment and maximises your cash flow. Instead of paying both principal and interest, you pay only the interest component for an agreed period, usually one to five years. At the end of that period, the loan reverts to principal and interest unless you apply to extend the interest-only term.

The benefit is immediate. A loan of $600,000 at a variable rate will cost roughly $3,200 per month on an interest-only basis, compared to around $3,800 on principal and interest. That $600 difference can be redirected into your offset account, used to service other debt, or retained as a buffer for vacancy and maintenance. Over a five-year interest-only period, you're not reducing the loan balance, but you're preserving capital and maintaining flexibility.

Lenders assess interest-only applications more conservatively than principal and interest. They'll typically cap the LVR at 90 per cent and apply a slightly higher serviceability test. If your borrowing is already marginal under a principal and interest structure, you may not qualify for interest-only, or the lender may require a larger deposit.

Tax treatment under the new quarantine rules and what remains deductible

Interest on the portion of your loan used to acquire or hold the rental property remains fully deductible, as do council rates, body corporate fees, landlord insurance, property management fees, repairs, and depreciation on plant and equipment. What changes from 1 July 2027 is where you can apply the net loss. If your deductible expenses exceed your rental income, that loss can only offset other residential rental income, be carried forward to offset future rental income, or be applied against a capital gain when you sell the property. It cannot reduce your salary, business income, or dividends.

Properties purchased before 7:30pm AEST on 12 May 2026, or properties that qualify as eligible new builds, are exempt from the quarantine. An eligible new build includes 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 dwelling does not qualify, nor does a substantial renovation. If you're considering a new apartment in one of the developments near Burwood Station, confirm with the developer and your accountant that the property meets the definition before assuming you can negatively gear it.

Debt-to-income caps and how they constrain high-income borrowers

From 1 February 2026, APRA restricted lenders from funding more than 20 per cent of their new investor loans at a debt-to-income ratio of six times or greater. That cap is applied separately to the investor portfolio, so even if you're borrowing for investment purposes, your total debt across all purposes is measured against your gross income. If you earn $150,000 and already have $600,000 in debt against your home, a lender cannot approve a new investment loan of $400,000 unless the application falls within their 20 per cent allocation or qualifies for an exemption.

The cap has reduced the number of investors who can add multiple properties in quick succession without first paying down existing loans or significantly increasing their income. It also means that if you're already at or near six times your income, you may need to apply to a different lender with capacity remaining in their allocation, or wait until you've reduced your overall debt.

What to bring to the loan application

Lenders will ask for payslips covering the most recent three months, tax returns for the past two years if you're self-employed, and details of any existing liabilities including credit cards, personal loans, and investment loans. If you're relying on rental income from another property, they'll want a copy of the lease and evidence of rental payments hitting your account. If you're using equity to fund the deposit, they'll require a valuation of the property being used as security, and they'll want to see that you can service both loans after applying the three percentage point buffer.

For the property you're purchasing, the lender will order their own valuation, and they'll assess the rental income using a market rent assessment or the lease you provide if the property is tenanted. They'll also check your credit file, your savings history, and whether you've met any conditions from previous loan applications. The process typically takes between five and ten working days from full documentation to formal approval, assuming no issues arise with the valuation or your financial position.

When refinancing your existing property makes sense before buying another

If you purchased your home several years ago and have built up equity, refinancing to access that equity and restructure your debt can improve your serviceability and reduce your overall borrowing cost. Consider a buyer who owns a home valued at $900,000 with a remaining loan of $500,000. They have $220,000 in usable equity at 80 per cent LVR. By refinancing to release that equity, they can fund the deposit and costs for the investment property without needing cash savings, and they may also secure a lower rate if their existing loan is uncompetitive.

Refinancing also gives you the opportunity to consolidate other debt, remove Lenders Mortgage Insurance from your existing loan if your LVR has dropped below 80 per cent, and restructure your repayments to align with your current income. The cost of refinancing includes discharge fees from your current lender, application fees with the new lender, and valuation costs. Those fees typically total between $800 and $1,500, which can be offset by the rate saving and the additional borrowing capacity the refinance unlocks.

Call one of our team or book an appointment at a time that works for you. We'll review your current position, run the numbers on your borrowing capacity under the new debt-to-income and tax rules, and help you structure your investment property finance to align with your goals.

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