The Pros and Cons of Investment Loan Approval

Getting approval for an investment loan feels different now compared to two years ago.

Lenders are working with tighter debt-to-income limits, buyers are weighing up negative gearing changes that take effect in July 2027, and borrowing capacity is no longer just about income and expenses. Black Rock investors looking to grow a portfolio or add a first rental property need to understand how these shifts affect what they can borrow, which lenders are prepared to lend, and how their loan structure affects both serviceability and long-term returns.

How Lenders Calculate What You Can Borrow for Investment Property

Lenders assess your ability to service an investment loan by adding a buffer of three percentage points to the interest rate on your proposed borrowing, then testing whether you can cover all loan repayments alongside your existing commitments. Since February 2026, debt-to-income caps also apply. Most lenders can write up to 20 per cent of their new investor lending to borrowers with debt-to-income ratios of six times or higher, but the majority of approvals sit below that threshold.

Rental income is typically assessed at 80 per cent of the projected rent to allow for vacancy and maintenance. If you are purchasing a property in Black Rock close to the beach or near the station precinct, rental demand tends to be steady, but lenders still discount the income. Consider a buyer looking to purchase a two-bedroom unit near the foreshore with expected rental income of $650 per week. The lender will assess serviceability using $520 per week, not the full amount.

Your existing home loan, personal debts, and credit card limits all reduce your borrowing capacity. A credit card with a $20,000 limit can reduce what you can borrow by $80,000 or more, even if the balance is zero. Reducing or closing unused credit before applying makes a measurable difference.

Negative Gearing and the July 2027 Changes

Under current rules, if your rental property expenses exceed your rental income, you can offset that loss against your other income such as salary or business earnings. From 1 July 2027, that option is removed for residential properties purchased on or after 7:30pm AEST on 12 May 2026, unless the property qualifies as an eligible new build. Losses on affected properties can only be offset against other residential rental income or carried forward to offset future rental income or capital gains.

Properties you already own, or those you entered a contract to buy before 12 May 2026, are not affected. Those properties continue under the existing negative gearing rules until you sell. Properties purchased between 12 May 2026 and 30 June 2027 can be negatively geared under the old rules until 30 June 2027 only.

Eligible new builds retain full negative gearing. A new build is defined as a dwelling constructed on previously vacant land, or a development where the number of dwellings increases. A knock-down rebuild that replaces one house with one house does not qualify. A knock-down rebuild that replaces one house with two townhouses does qualify. If a new build is occupied for more than 12 months before being sold to a subsequent investor, that subsequent investor loses access to negative gearing.

This affects borrowing capacity because lenders assess serviceability on a principal-and-interest basis, even if you apply for interest-only repayments. If the property cannot be negatively geared and you plan to hold it with negative cash flow, you need other income or rental properties in the black to demonstrate serviceability.

Interest Only or Principal and Interest

Most investors choose interest-only repayments for the first one to five years to improve cash flow and preserve capital for further investment. Lenders assess your application on a principal-and-interest basis regardless of what repayment type you request, so the approval does not change, but your actual repayment does.

Interest-only loans typically carry a slightly higher rate than principal-and-interest loans, often between 0.10 and 0.25 percentage points depending on the lender. Once the interest-only period ends, the loan reverts to principal and interest for the remaining term, and the repayment increases.

If you are purchasing an established property in Black Rock after 12 May 2026 and cannot offset rental losses against your salary, an interest-only structure may not deliver the cash flow benefit it once did. You still defer principal repayments, but the loss you carry forward each year grows larger because your deductions remain high while rental income stays the same. Principal-and-interest repayments reduce your deductions over time, which can be more useful when losses are quarantined.

Loan to Value Ratio and Lenders Mortgage Insurance

Most lenders will lend up to 90 per cent of the property value for investment purchases, but borrowing above 80 per cent means paying Lenders Mortgage Insurance. LMI protects the lender, not you, and the premium is calculated based on the loan amount and the loan-to-value ratio. For a property valued at $1.2 million with a 10 per cent deposit, LMI can add $30,000 to $50,000 to your upfront costs, depending on the lender and your circumstances.

If you own your home and have built equity, you may be able to leverage that equity to fund your deposit and avoid paying LMI out of pocket. The premium can be capitalised into the loan, but that increases your borrowing and your repayments. Some lenders also tighten their serviceability assessment when LMI is required, particularly for borrowers with debt-to-income ratios above five times.

Fixed Rate or Variable Rate

Fixed rates give you certainty over repayments for a set period, typically one to five years. Variable rates move with the market and typically offer offset account access and unrestricted extra repayments. If you are purchasing an investment property and plan to make regular extra repayments or use an offset to manage tax, a variable rate is usually more practical. If cash flow is tight and you want predictable repayments, a fixed rate offers more control.

Some investors split their loan between fixed and variable. You lock in part of the debt to protect against rate rises, and leave part variable to retain flexibility. Splitting adds a small amount of complexity at tax time because offset accounts are only linked to the variable portion, but the structure works well for buyers who want both certainty and access to redraw or extra repayments.

Rate discounts are not uniform. Lenders offer different margins depending on the loan size, the loan-to-value ratio, and whether you are an existing customer. A Black Rock investor refinancing from another lender will often secure a larger discount than someone staying with their current lender, simply because the new lender is competing for the business.

How the Foreign Investment Ban Affects Local Supply and Prices

Foreign buyers have been prohibited from purchasing established dwellings in Australia since 1 April 2025, and the ban now runs until 30 June 2029. The intent is to reduce competition for existing housing stock and redirect foreign capital toward new builds. For Black Rock investors, this removes one segment of buyer demand, particularly for apartments and units close to the beach that previously attracted offshore purchasers.

Local buyers are not directly affected by the ban, but the reduction in competition has contributed to more stable pricing in some parts of the Bayside market. Foreign investment in new developments is still permitted and encouraged, so the rule change has not reduced housing supply.

Rental Income and Vacancy Rates

Lenders assess rental income conservatively, but actual rental performance depends on location, property type, and tenant demand. Black Rock sits between Brighton and Beaumaris, with strong appeal to families and professionals looking for proximity to the bay and good schools. Vacancy rates in the area are typically low, but lenders do not adjust their serviceability assessment based on local conditions. They apply a fixed discount to projected rent regardless of whether the property is in Black Rock or regional Victoria.

If you are purchasing a property that requires renovation or has been tenanted below market rent, you cannot use the improved rental figure in your application until the lease is signed and the tenant has moved in. Lenders assess based on current rent or a valuer's opinion of market rent at the time of purchase.

Claimable Expenses and Maximising Tax Deductions

Interest on your investment loan is fully deductible as long as the property is rented or genuinely available for rent. Other claimable expenses include property management fees, council rates, water charges, building insurance, landlord insurance, repairs and maintenance, body corporate fees for units and townhouses, and depreciation on the building and fixtures.

Stamp duty and loan establishment fees are not immediately deductible. Stamp duty forms part of the cost base for capital gains tax purposes, and loan costs are deductible over five years or the term of the loan, whichever is shorter. Keeping a separate loan for your investment property and avoiding mixing funds with your home loan makes tax reporting clearer and ensures all interest is deductible.

If you are unsure how the negative gearing changes or capital gains tax reforms affect your situation, speak with a registered tax agent before making any purchase decisions. We work with investors regularly and can refer you to specialists who understand property tax.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions