If you want to buy a rental property for income, the way your loan is structured matters as much as the property you choose. A broker can compare loans from the lenders on their panel, so you are not stuck with whatever one bank decides to offer.
This guide is for Coogee locals weighing up a first or next investment purchase. It covers how lenders count rent, how interest only compares with principal and interest, and how recent tax changes may affect your plans.
How Does a Lender Assess an Investment Loan Application?
A lender checks that you can afford the loan at a rate well above the one you will actually pay. Banks and other authorised deposit-taking institutions must test new borrowers at an interest rate at least 3.0 percentage points above the loan rate.
That test applies to your whole budget, including your existing debts and credit card limits. Lenders also count only part of your expected rent. APRA's guidance says a prudent lender applies a minimum 20 per cent haircut to expected rent, so no more than 80 per cent counts towards your income. That haircut allows for gaps between tenants. It does not cover agent fees or repairs.
You can get a feel for your numbers using our borrowing capacity page before you start inspecting. A broker can then compare how different lenders treat your rental income, as policies vary.
Interest Only or Principal and Interest: Which Suits a Rental Property?
Interest only keeps repayments lower for a set period, while principal and interest pays the loan down from day one. Neither is right for everyone, and the trade-off is that interest only does not reduce your loan balance during that period.
Interest only does not boost how much you can borrow either. Lenders assess it over the shorter remaining term once the interest-only period ends, which usually gives a lower maximum loan than the same loan on principal and interest.
Here is an illustrative example using 6.75% p.a. Say you borrow $600,000 over 30 years. Interest only repayments would be about $3,375 a month ($600,000 x 6.75% / 12). On principal and interest over 30 years, repayments would be about $3,892 a month.
Now say the loan has a 5-year interest-only period on a 30-year term. When that ends, you still owe $600,000, but only 25 years remain. At the same 6.75%, repayments jump to about $4,145 a month. That is around $770 a month more than during the interest-only years.
So the lower early repayment helps cash flow, but the later step up is real. Our mortgage repayment calculator lets you test your own figures. This example is illustrative only and not a quote.
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What Does a Lower Deposit Mean for Your Investment Loan?
Borrowing more than 80 per cent of the property value generally means paying Lenders Mortgage Insurance (LMI). The 80 per cent line is the point where LMI is usually required. It is not a legal limit on borrowing.
Each lender sets its own caps above 80 per cent, and the LMI insurer must also approve the loan. The premium is paid by you, and it depends on the loan amount and loan to value ratio (LVR). The trade-off is that a smaller deposit gets you into the market sooner, but you pay the premium and carry a bigger loan.
If you already own a home, you may be able to use equity as your deposit. The catch is that how you use the borrowed money decides whether the interest is deductible. Borrowing against equity for personal spending, such as a holiday, does not create deductible interest. Keep the investment funds separate and speak to your accountant.
How Do Recent Negative Gearing Changes Affect Buyers?
The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 is now law, but the new loss rule is not yet operating. If you held a residential investment property at 7:30pm AEST on 12 May 2026, including one under contract, losses continue to be deductible against your other income, such as salary, until you sell it.
From the 2027-28 income year, net rental losses from established residential properties acquired after that time can only be used against other residential property income, including capital gains on residential property. Excess losses can be carried forward. Properties bought between that time and 30 June 2027 can use the current rules until 30 June 2027 only. Eligible new builds can still deduct losses against all income.
This changes how a loss can be used. It does not change the fact that interest on money borrowed for a rental property is deductible, though only the interest part of a principal and interest repayment counts. The principal part is not deductible. Because your cash flow may rely on a tax refund, speak to your accountant before you sign a contract.
What Changes for Capital Gains Tax on a Rental Property?
The 50 per cent CGT discount still applies to gains on residential property held for more than 12 months, up until 1 July 2027, for individuals, trusts and partnerships. From 1 July 2027, it is replaced by cost base indexation using CPI and a 30 per cent minimum tax rate on real gains accruing from that date.
For property owned before that date and sold afterwards, the gain is split. The part that accrued before 1 July 2027 follows the current rules, and the rest follows the new rules. You can use a market valuation at 1 July 2027 or an ATO formula to apportion it. These rules are detailed, so your accountant should guide you on timing and your own outcome.
Why Use a Broker Instead of Going Straight to Your Bank?
A broker can compare loans from the lenders on their panel, while your own bank can only offer its own products. That wider view matters because policies on rental income, LVR, interest only terms and fees differ between lenders.
We are generally paid by the lender when your loan settles. We are required to act in your interests and can explain how we are paid. We look at features and costs together, including offset accounts, fixed or variable rates, and what a loan will cost to refinance later. A lender's rate discount is only one part of the picture, so we weigh it against fees and flexibility.
If you already have an investment loan, a loan health check can show whether your current setup still suits you, and refinancing may be worth exploring. Our Coogee mortgage broker team can walk you through it in plain English.
Ready to talk about buying an investment property? Call one of our team or book an appointment at a time that works for you through our book appointment page. We will compare your options and explain each one clearly, so you can move ahead with confidence.
Frequently Asked Questions
Does an interest only loan let me borrow more?
No. Lenders assess interest only loans over the shorter remaining term once the interest-only period ends. This usually means a lower maximum loan than an equivalent principal and interest loan.
How much of my expected rent will a lender count?
APRA's guidance says prudent lenders count no more than 80 per cent of expected rent. Individual lenders set their own policies on what rental evidence they accept.
Do I need LMI on an investment loan?
LMI is generally required when you borrow more than 80 per cent of the property value. Each lender sets its own caps, and the insurer must also approve the loan.
Have negative gearing rules changed?
The Act is law. From the 2027-28 income year, losses on established residential properties bought after 7:30pm AEST on 12 May 2026 can only be used against residential property income. The current rules apply until 30 June 2027. Speak to your accountant about how this affects you.
