Understanding the basics of property investment loans

You want to buy a rental property in the Inner West and you need finance to do it.

An investment loan works differently to an owner-occupier loan. The lender assesses you on rental income, not just your salary, and the rates are higher because the regulator treats landlords as riskier borrowers. Since mid-2026, the tax treatment of rental losses has changed for new purchases, which affects how much cash flow you need and whether certain properties still make sense. If you're buying in Marrickville, Stanmore, or Newtown, you're looking at properties that often need renovation or come with strata fees, so knowing how lenders assess those costs matters as much as knowing the rate.

This article walks through how investment borrowing actually works, what's shifted under the new tax rules, and the practical trade-offs between interest-only and principal-and-interest repayments when you're building a portfolio.

How lenders assess rental income and serviceability

Lenders will count 80 per cent of the expected rent when they calculate how much you can borrow. They apply a serviceability buffer of three percentage points above the loan rate, which means if the variable rate is 6.5 per cent, they test whether you can still afford repayments at 9.5 per cent. That buffer hasn't changed, but the debt-to-income cap introduced in February means some lenders now limit how much you can borrow relative to your total household income, especially if you already have a mortgage or other debts.

Consider a buyer looking at a two-bedroom unit in Dulwich Hill with rent around $650 per week. The lender uses $520 of that (80 per cent) as assessable income and adds it to the buyer's salary. If the buyer earns $95,000 and already has a $500,000 owner-occupied loan, the lender checks whether the new borrowing pushes total debt above six times income. If it does, the application falls into the restricted bucket where only 20 per cent of new loans can be approved, and some lenders just decline rather than manage the quota. The outcome is that borrowing capacity for investors has tightened, even if you can afford the repayments.

Interest-only versus principal and interest on rental properties

Most investors used to choose interest-only because it kept repayments lower and maximised the deduction. You're still allowed to do that, but the landscape has shifted.

Interest-only periods run for one to five years, then the loan converts to principal and interest unless you apply to extend. Lenders price interest-only loans around 0.15 to 0.30 percentage points higher than principal-and-interest loans on the same product. That gap has widened slightly as lenders respond to APRA's focus on portfolio risk. If you're planning to hold the property long-term and you want to pay down debt or build usable equity for the next purchase, principal and interest makes sense from day one. If cash flow is tight or you're planning to sell within a few years, interest-only can help in the short term, but you need a plan for when the term ends and repayments jump.

What the negative gearing changes mean for new purchases

From 1 July 2027, rental losses on properties bought after 12 May 2026 can't be offset against your salary. You can still claim all the same deductions, but if the property runs at a loss, that loss gets quarantined. You carry it forward and use it against future rental income or capital gains on residential property.

If you bought before 12 May 2026 or you're buying an eligible new build, the old rules still apply and you can offset losses against wage income. That's created a two-tier market. Established properties bought now are less attractive if you were relying on the tax refund to cover part of the holding cost. New builds, including properties where an existing dwelling has been replaced with multiple units, remain eligible for traditional negative gearing indefinitely.

In practice, this means you need more cash flow to hold an established rental property. If a Newtown terrace costs you $4,200 a month in loan repayments and brings in $3,400 in rent after vacancy and strata, you're $800 short each month. Under the old rules, you'd claim that loss and get a few hundred back at tax time. Now, you bank the loss and wait until you sell or until the rent rises enough to turn a profit. That's fine if you've got the income to cover it, but it's a different proposition to what most landlords were used to.

You can read more about how investment loans are structured and what lenders look for when you're building a portfolio.

Loan-to-value ratio and deposit requirements

Most lenders want at least a 20 per cent deposit for rental property, which puts you at 80 per cent loan-to-value. If you borrow more than that, you'll pay Lenders Mortgage Insurance, and the premium is higher for investment lending than it is for owner-occupiers. Some lenders cap investor LVR at 90 per cent, others at 95 per cent, but the pricing gets steep and your serviceability shrinks because the lender has to account for the LMI premium in the loan amount.

If you're using equity from your home to fund the deposit, the lender treats the total exposure across both properties as one assessment. They'll value your home, apply a lending ratio (usually 80 per cent), subtract what you owe, and tell you how much you can access. That amount becomes your deposit, but the lender still tests serviceability on both loans combined, so releasing equity doesn't mean you can borrow unlimited amounts on the investment side. You can check how much you might be able to access through a borrowing capacity calculation before you start looking at properties.

Fixed or variable rates for rental properties

Variable rates sit around 6.4 to 6.7 per cent for investment loans depending on the lender and your LVR. Fixed rates are comparable or slightly lower on some terms, but you lose the ability to make extra repayments and you can't redraw funds without breaking the fixed period. If you're planning to use equity again in two years to buy a second property, locking in a five-year fixed term creates a problem because you'll pay break costs when you refinance or restructure.

Splitting the loan, half variable and half fixed, is common. You get some rate certainty and you keep some flexibility to access equity or make lump-sum repayments on the variable portion. There's no universal right answer, it depends on whether you value certainty over optionality and how soon you're planning your next move. If you've already got a home loan on a fixed rate that's ending soon, you might want to read about your fixed rate expiry options before layering another fixed loan on top.

What to bring when you apply

Lenders want two years of tax returns if you're self-employed, recent payslips if you're on salary, and a rental appraisal for the property you're buying. The appraisal needs to be current, on letterhead, and signed by a licensed agent. If the property is tenanted, bring the lease. If it's vacant, the lender uses the appraisal and applies a vacancy factor, usually one to two weeks per year depending on the postcode.

You'll also need to show how you're funding the deposit. If it's savings, they want three months of statements. If it's equity, they want a valuation or recent sale evidence on your existing property. If someone is gifting you part of the deposit, some lenders accept that for investment purchases but most want a signed declaration and proof the funds have landed in your account. The application takes longer than an owner-occupier loan because there's more documentation and the credit team applies stricter serviceability overlays, so start the process before you make an offer if you're buying at auction.

You can lodge an investment loan application through a broker who has access to a wider panel than you'd get walking into a single bank, and they'll tell you upfront which lenders are actually writing investment loans at higher LVRs or with more flexible servicing.

Strata fees, council rates, and how lenders treat outgoings

If you're buying a unit or townhouse in the Inner West, strata fees run anywhere from $800 to $2,000 per quarter depending on the size of the block and what's included. Lenders add those fees to your ongoing expenses when they calculate serviceability, the same way they add council rates, landlord insurance, and an allowance for maintenance. They don't take your word for it, they pull the strata report or ask for a rates notice.

If the strata has a history of special levies or the sinking fund is underfunded, some lenders will either decline or factor in a future levy when they assess whether you can service the loan. That's particularly relevant in older blocks around Marrickville and Petersham where the building might need major works in the next few years. The strata report matters as much as the property valuation, and if the lender's valuer flags building defects or cladding issues, your approval can be pulled even after formal offer.

Rental vacancy, land tax, and ongoing costs you need to budget for

Rent doesn't come in every single week. Vacancy, tenant turnover, and maintenance all cost money. A realistic budget assumes two weeks vacant per year, one month's rent in agent fees when you re-lease, and around one per cent of the property value per year in repairs. If the property is older or has a yard, budget more.

Land tax applies in New South Wales once your total investment land value exceeds the threshold, which is currently $1,075,000 for investors. If you own multiple properties, the values are aggregated. If you're buying your first rental and the land value is under that threshold, you won't pay land tax yet, but if you're building a portfolio, it's a cost you need to model in. The rate starts at $100 plus 1.6 per cent of the value above the threshold and scales up from there, so it can easily run into thousands once you're holding two or three properties.

You can claim land tax, strata fees, council rates, insurance, and all loan interest as deductions, but under the new quarantine rules those deductions only help if you've got other rental income or you're prepared to carry the loss forward. They don't reduce your tax bill in the same year unless the property is cashflow positive or you bought before the May 2026 cut-off.

When refinancing an investment loan makes sense

Refinancing works the same way as the original application. The lender reassesses your income, your debts, and the rental income from all properties. If rates have dropped or your current lender isn't offering you a discount, moving to another lender can save you several thousand a year. If you've paid down your loan or the property has increased in value, refinancing also lets you pull out equity to fund the next deposit.

Timing matters. If you're on a fixed rate, breaking early triggers a break cost that can outweigh the benefit of a lower rate elsewhere. If you're on a variable rate with a high LVR and you've now crossed below 80 per cent, refinancing gets rid of LMI on any future top-up and often unlocks a lower rate. Most lenders also let you switch from interest-only to principal-and-interest or vice versa when you refinance, so it's a good moment to revisit your structure if your situation has changed. You can read more about how refinancing works and what costs to expect.

Call one of our team or book an appointment at a time that works for you. We'll walk through your numbers, show you what you can borrow, and help you sort out a structure that fits where you're heading with the portfolio.

Frequently Asked Questions