The Ins and Outs of Investment Loan Applications

Your investment loan application will be assessed differently to an owner-occupier application. Lenders apply higher risk weights to investor lending, which flows through to stricter serviceability tests, higher interest rates and more detailed documentation requirements.

How Lenders Assess Investment Loan Serviceability

Every lender will test your ability to repay the loan at an interest rate at least 3 percentage points above the actual loan rate. If you're applying for a variable rate investment loan at 6.5 per cent, the lender will assess whether you can still afford the repayments if the rate reaches 9.5 per cent. This buffer has been in place since October 2021 and applies to all new borrowers, whether you're buying your first investment property or your fifth.

Consider a borrower applying for finance on a unit in Ashfield. They earn $120,000 and want to borrow $600,000. The lender won't just look at whether they can afford the repayments at the current variable rate. They'll calculate repayments at a rate above 9 per cent, factor in the borrower's existing living expenses, any other debts, and only then decide how much rental income to include in the assessment. Most lenders will accept 80 per cent of the expected rental income, not the full amount, to account for vacancy and maintenance periods.

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

From February this year, lenders can only approve a maximum of 20 per cent of new investor loans to borrowers with total debt more than six times their annual income. The limit applies separately to investor lending, so it doesn't get averaged out with owner-occupier loans. If your total borrowing across all properties, including your home, would push you above six times your income, you may still be approved, but you'll need to apply with a lender that hasn't already exhausted its quarterly quota.

This doesn't mean you can't borrow above six times your income. It means fewer applicants will be approved in that range, and timing matters. A borrower applying early in a calendar quarter may have more lender options than someone applying late in March, June, September or December when some lenders have already hit their limit.

What Documentation You'll Need for Your Application

Investment loan applications require more evidence than most borrowers expect. You'll need to provide payslips, tax returns, and bank statements, but lenders will also want to see a rental appraisal for the property you're buying, proof of your deposit including the source of those funds, and evidence of your current assets and liabilities.

If you're using equity from another property as part of your deposit, the lender will require a valuation of that property before they calculate how much you can borrow. If you're planning to claim depreciation or other investment property tax deductions, the lender won't factor those into your serviceability assessment upfront, even though they'll reduce your tax liability down the track. Serviceability is based on gross income, not after-tax cash flow.

In our experience, the most common delay in investment loan applications comes from incomplete disclosure of liabilities. If you have a credit card with a $20,000 limit but only owe $2,000 on it, the lender will assess your serviceability as though you owe the full $20,000. The same applies to buy now, pay later accounts, car loans, and any other facility where you have access to credit. Closing accounts you're not using or reducing credit limits before you apply can materially improve your borrowing capacity.

Interest-Only Repayments and How They Affect Approval

Many property investors choose interest-only repayments to maximise tax deductions and preserve cash flow, particularly in the early years of ownership. Lenders will approve interest-only loans on investment properties, but the interest-only period is typically capped at five years, and you'll need to demonstrate that you can afford to repay the loan on a principal-and-interest basis once that period ends.

If you're applying for an interest-only loan above 80 per cent loan-to-value ratio and the interest-only term is longer than five years or not specified, the loan will be classified as non-standard under the current prudential framework. That doesn't mean you can't get it approved, but it will attract higher capital requirements for the lender and usually a higher interest rate for you.

How Lenders Treat Rental Income in the Assessment

Lenders don't accept 100 per cent of projected rental income when calculating your serviceability. Most will include between 70 and 80 per cent of the rent to allow for vacancies, maintenance and management costs. The rental figure itself will come from a formal rental appraisal, not your own estimate or an advertisement you've seen for a similar property.

If the property you're buying is already tenanted, some lenders will accept the existing lease as evidence of rental income, but only if the lease has at least six months remaining and the tenant has a solid payment history. If you're buying a vacant property or settling before a tenant moves in, you'll need a licensed property manager or real estate agent to provide a written appraisal.

For borrowers purchasing a unit in a block with high owner-occupier turnover or a suburb where vacancy rates have recently increased, lenders may apply an additional discount to the rental assessment. This is more common in areas with a high volume of new apartment supply or locations where short-term rental restrictions have recently been introduced.

How Your Loan Structure Affects Your Application

The way you structure your investment loan has a direct impact on how lenders assess the application and how much you'll pay in interest over time. Choosing between variable and fixed rates, interest-only and principal-and-interest, and offset accounts versus redraw facilities all change the risk profile of the loan from the lender's perspective.

A variable rate loan gives you flexibility to make extra repayments and access features like offset accounts, which can reduce the interest you pay without reducing your tax-deductible debt. A fixed rate loan offers repayment certainty but usually comes with restrictions on extra repayments and higher break costs if you exit the loan early. Some investors split their loan between fixed and variable to balance flexibility and certainty, but this can add complexity to your application and may require separate approvals for each portion.

If you're planning to build a portfolio of multiple investment properties, the structure of your first loan will affect your borrowing capacity for the second. Lenders will assess your total debt position, not just the individual loan, so keeping your borrowing capacity as high as possible means minimising non-deductible debt and structuring each loan to preserve equity and cash flow.

Lenders Mortgage Insurance and High LVR Investment Loans

If your deposit is less than 20 per cent of the property value, you'll need to pay lenders mortgage insurance. LMI protects the lender if you default, not you, but the premium is your cost. It's calculated based on the loan amount and the loan-to-value ratio, and it can add several thousand dollars to your upfront costs.

LMI premiums for investor loans are higher than for owner-occupier loans at the same LVR. Some lenders will approve investment loans up to 90 per cent LVR with LMI, but availability has tightened, and you'll need strong serviceability and a clean credit history to be considered. If you're refinancing an existing investment loan or purchasing a second property, some lenders will allow you to use equity from another property to avoid LMI, provided the combined LVR across both properties stays within their policy settings.

Stamp duty on LMI premiums may apply depending on which state or territory the property is located in. In New South Wales, stamp duty on LMI was abolished from July 2017, but it still applies in some other jurisdictions.

What Happens After You Submit Your Application

Once your application is lodged, the lender will order a property valuation. The valuer will inspect the property and provide a report to the lender, not to you, though most brokers can arrange for you to receive a copy. If the valuation comes in below the purchase price, the lender will assess your application based on the lower figure, which means you'll need a larger deposit or a willingness to pay LMI on a higher LVR.

Valuations on units can be affected by the number of sales in the building over the previous 12 months, the percentage of owner-occupiers versus investors, and whether there are any significant defects or special levies on the horizon. If the building has more than 50 per cent investor ownership or non-resident ownership, some lenders will decline the application outright or apply a higher interest rate. The same applies to serviced apartments or properties with hotel-style management agreements.

Conditional approval usually takes between three and seven days, depending on the lender and the complexity of your application. Formal approval, which includes the valuation and final credit assessment, can take another week or two. If you're buying at auction or working to a tight settlement deadline, lodging your application as early as possible gives you room to address any issues that come up during the assessment.

If you're considering refinancing an existing investment loan or consolidating debt as part of your application, the process will take longer because the lender will need to assess your current loans, obtain payouts, and verify your equity position across all properties.

You don't need to go through this on your own. Call one of our team or book an appointment at a time that works for you, and we'll walk you through exactly what your application needs and which lenders are most likely to approve your scenario.

Frequently Asked Questions