How is an investment property loan different from an owner-occupied home loan?
The underlying mortgage process can be similar, but lenders may assess and price investment lending differently from owner-occupied lending. Differences may potentially include:
- interest rates
- lending policy
- serviceability
- loan-to-value requirements
- interest-only availability
- product features
- fees
Differences are not universal
Exact differences vary between lenders and products, so it isn't accurate to assume investment lending always looks the same across the market.
How much can I borrow for an investment property?
There is no single borrowing-capacity figure that applies across all lenders. A lender may consider factors including:
- employment and income
- existing home loans
- personal loans
- vehicle finance
- credit facilities
- living expenses
- dependants
- expected rental income
- existing rental income
- investment-property expenses
- proposed loan repayments
- applicable serviceability requirements
Different lenders, different outcomes
Different lenders can produce different outcomes on the same set of financials, which is why an indicative figure from one calculator is not a market-wide answer.
Does rental income increase borrowing capacity?
Rental income can form part of a lender's serviceability assessment. However, lenders may not simply use 100% of expected gross rent as available income.
The lender may make allowances for matters such as:
- vacancies
- property expenses
- reliability of rental income
- lender policy
What the regulator's guidance recognises
APRA's residential mortgage lending guidance specifically recognises that expected rental income may be considered while allowing for periods of non-occupancy and property-related expenses. There is no single rental-income percentage that applies to every lender, and lenders do not all calculate rental income the same way.
What if the property is vacant?
A mortgage still needs to be serviced when an investment property is vacant. Moneysmart warns investors not to rely on rental income always covering the mortgage because there may be periods when the property is empty.
Investors should also consider ongoing property costs such as:
- council and water rates
- insurance
- body corporate or strata fees where applicable
- property management
- repairs and maintenance
- land tax where applicable
- other ownership costs
Can I use equity in my home to buy an investment property?
Potentially. Equity broadly refers to the difference between a property's value and the debt secured against it.
For example, an owner may have built equity through reducing their home-loan balance, increases in property value, or both.
A lender may potentially allow some available equity to support another property purchase, subject to valuation, serviceability, LVR and lending criteria. Having equity does not automatically mean you can borrow it — the borrower still needs to satisfy the lender's credit assessment, and there is no universal percentage of equity that is simply available.
Do I still need a deposit if I have equity?
Available equity may potentially be used as part of the funding structure for an investment purchase. Whether additional cash is required depends on matters including:
- available equity
- lender valuation
- existing debt
- purchase price
- proposed loan structure
- transaction costs
- lender requirements
Equity and capacity are different things
Equity and borrowing capacity are different concepts. A borrower may have substantial property equity but still have limited borrowing capacity.
What is loan-to-value ratio?
Loan-to-value ratio, or LVR, compares the amount borrowed with the lender's accepted value of the property securing the loan. Expressed simply: LVR = loan amount ÷ property value × 100.
LVR can affect lending options, pricing and whether lenders mortgage insurance may be relevant. The lender's valuation may differ from the purchase price or an online property estimate, and acceptable LVR levels vary between lenders and products.
Should an investment loan be interest-only or principal and interest?
Neither repayment type is universally better.
Principal and interest
Repayments cover both interest and part of the amount borrowed, progressively reducing principal over time.
Interest-only
During an interest-only period, scheduled repayments generally cover interest without reducing principal through those scheduled repayments. At the end of the interest-only period, repayments generally increase when the loan converts to principal-and-interest repayments over the remaining term.
Moneysmart warns borrowers to understand whether they can afford the higher repayments after an interest-only period ends. Interest-only lending can also result in more interest being paid over the life of the loan compared with an otherwise equivalent principal-and-interest structure.
Is interest on an investment property loan tax deductible?
This is a taxation question and Rove Financial does not provide tax advice. The tax treatment of interest can depend on the purpose and use of borrowed funds and the borrower's circumstances.
The ATO provides guidance about rental-property expenses and interest deductions. Borrowers should obtain advice from a qualified tax professional about their circumstances.
Why does the purpose of borrowed money matter?
The purpose and use of borrowed funds can have tax consequences. For example, using redraw funds for a different purpose may create different tax consequences from simply leaving money in an offset account. Rove Financial does not provide tax advice.
Borrowers with investment lending should consider obtaining professional tax advice before:
- redrawing funds
- mixing private and investment borrowing
- restructuring loans
- refinancing mixed-purpose debt
Should I use an offset account for an investment property loan?
An offset account may reduce the balance on which loan interest is calculated, depending on the product. Whether an offset is useful depends on factors such as:
- cash balances
- interest rate
- fees
- loan structure
- how the borrower intends to use their funds
Tax consequences can matter
Tax consequences can also matter when comparing offset and redraw strategies for investment lending. Rove Financial does not provide tax advice.
What is cross-collateralisation?
Cross-collateralisation generally occurs when more than one property is used as security across lending arrangements. For example, a lender may hold security over both an existing home and an investment property.
This can sometimes simplify a transaction, but it can also affect flexibility when:
- selling a property
- refinancing
- restructuring debt
- moving one loan to another lender
- releasing security
Understand the security structure
Cross-collateralisation is not automatically wrong. But investors should understand how their properties are secured and whether that structure supports their future plans.
Should investment loans be kept separate?
Keeping different lending purposes clearly identifiable can be useful for administration and future restructuring. However, the appropriate structure depends on the circumstances.
Tax treatment of loan interest can depend on how borrowed funds are used, so borrowers should obtain appropriate tax advice before establishing or changing investment lending.
Fixed or variable for an investment property?
Neither is universally better. An investor may consider:
- repayment certainty
- flexibility
- interest rate
- offset availability
- additional repayments
- break costs
- future refinancing
- future property plans
Split structures
A split structure may also be available depending on the lender and product.
How do existing investment properties affect borrowing capacity?
Existing investment properties can affect the assessment through both income and commitments. A lender may consider:
- existing mortgage debt
- rental income
- property-related expenses
- other liabilities
- loan repayments
- applicable serviceability assumptions
Equity is not capacity
Owning a property with substantial equity does not automatically mean the borrower can continue borrowing indefinitely. Serviceability still matters.
Why does loan structure matter if I want to buy more properties later?
A lending decision today can affect flexibility later. Investors planning future purchases may want to understand:
- which properties secure which loans
- available equity
- existing debt
- serviceability
- offset and redraw arrangements
- fixed-rate periods
- loan terms
- lender policy
No guarantees
Future borrowing capacity cannot be guaranteed, and no structure should be presented as a guaranteed way to build a property portfolio.
Should I use my home as security for an investment loan?
A lender may allow an existing owner-occupied property to support investment borrowing. However, borrowers should understand which assets are securing the debt and what can happen if repayments cannot be maintained.
Moneysmart notes that using your home as security for investment borrowing exposes the home to risk if the investment performs poorly and the loan cannot be repaid. This is a significant consideration rather than a technicality.
Can a mortgage broker help with investment lending?
Yes. A mortgage broker can help assess lending considerations such as:
- indicative borrowing capacity
- existing debts
- expected rental income
- available equity
- lender options available through their panel
- repayment structure
- fixed and variable options
- security structure
- application requirements
Where the decision sits
The lender ultimately makes the credit decision. A mortgage broker does not provide investment, tax or legal advice unless separately qualified and authorised.
What should I consider before applying for an investment property loan?
Before applying, it can be useful to understand:
- your current debts
- indicative borrowing capacity
- available deposit or equity
- expected rental income
- property ownership costs
- repayment type
- fixed or variable structure
- how the loan will be secured
- whether offset or redraw matters
- potential future borrowing plans
The goal isn't the maximum number
The goal isn't simply to maximise how much you can borrow. It's to understand how the proposed lending fits together.
Frequently asked questions
How much can I borrow for an investment property?
It depends on your income, expenses, existing debts, rental income, proposed lending and lender assessment. Different lenders may calculate borrowing capacity differently.
Can rental income be used for a home loan?
Rental income can form part of a lender's assessment, but lenders may apply allowances for vacancies, expenses and other risks.
Can I use equity to buy an investment property?
Potentially, subject to available equity, lender valuation, serviceability, loan structure and lending criteria.
Do I need a cash deposit if I have equity?
Not necessarily in every scenario, but the funding requirements depend on available equity, valuations, transaction costs, serviceability and lender requirements.
Is interest-only better for an investment property?
Not automatically. Interest-only can provide lower scheduled repayments initially but does not reduce principal through those repayments, and repayments generally rise when the interest-only period ends.
Is investment-loan interest tax deductible?
Tax treatment depends on the circumstances and use of borrowed funds. Obtain appropriate tax advice. Rove Financial does not provide tax advice.
Should I cross-collateralise investment properties?
There is no universal answer. Cross-collateralisation can affect flexibility, so borrowers should understand the security structure before proceeding.
Can I use my home to secure an investment loan?
Potentially, subject to lender requirements, but this can expose the home to additional risk. Understand the consequences before proceeding.
Can a mortgage broker help structure an investment property loan?
Yes. A broker can help assess lending options and loan structures available through their lender panel, while the lender makes the final credit decision.
General information only. This information does not take into account your objectives, financial situation or needs and is not investment, financial, tax or legal advice. Investment property lending involves financial risk. Rental income, property values and investment returns are not guaranteed. Lending criteria, rates, fees, valuation requirements, serviceability methods and loan features vary between lenders and may change. Rove Financial considers lending options available through its lender panel and does not represent that it compares every lender or product in the Australian market. Credit is subject to lender approval and applicable lending criteria. Consider obtaining independent financial, tax and legal advice where appropriate.