A strong investment loan application shows a lender that your income can carry the debt even if interest rates rise and the property sits vacant for a while. Sydney investors who understand how lenders test this can prepare before they apply, rather than after a decline.
This article explains how serviceability is assessed, how rental income and loan structure affect the result, and what to settle before you apply.
How Do Lenders Assess an Investment Loan Application?
Banks and other authorised deposit-taking institutions must assess whether you can afford the loan at an interest rate at least 3.0 percentage points above the loan's actual rate. This buffer applies to new borrowers, including those applying for an investment loan.
In practice, a loan priced at the illustrative rate of 6.75% p.a. would be tested at 9.75% p.a. Lenders also look at your existing debts, including credit card limits, which may be assessed using a notional repayment based on the limit rather than the balance. Closing unused cards before you apply can therefore lift the amount you may be able to borrow.
Non-bank lenders are not bound by the same serviceability buffer, although each still sets its own credit policy. A broker can compare these policies for you. If you want an early idea of your position, our borrowing capacity page is a good starting point.
How Is Rental Income Counted?
APRA's view is that prudent serviceability policies include a minimum 20 per cent haircut, so no more than 80 per cent of expected rent is counted. Each lender sets its own treatment of rental income.
The haircut allows for periods without a tenant. It does not cover agent fees, repairs or other holding costs, which still need to be met from your income. Lenders also tend to place less weight on a rental appraisal than on actual rent received, so a property that is already tenanted may be assessed differently from one that is vacant at purchase. Evidence rules vary by lender, so confirm what yours will accept before you sign a contract.
Does an Interest-Only Loan Increase Your Borrowing Power?
No. Interest-only does not increase what you can borrow. For interest-only loans, lenders assess whether you could afford principal and interest repayments over the remaining term after the interest-only period ends.
Consider an investor assessing a 30-year loan with a 5-year interest-only period. The lender tests repayments over the remaining 25 years, which gives a lower maximum loan than a standard 30-year principal and interest loan. As an example, on a $600,000 loan at the illustrative rate of 6.75% p.a., interest-only repayments are about $3,375 per month. Principal and interest over 25 years at the same rate is about $4,145 per month. The saving in cash flow is real, but the balance does not fall during the interest-only period, so you owe the same amount when repayments change.
The main trade-off is that you build no equity through repayments, and any growth in value has to do that work. Interest-only loans can also attract higher risk weights for the lender, and some lenders price them differently. Ask about this when comparing loan options.
Which Loan Structure Suits Your Investment Strategy?
The right structure depends on whether you want lower repayments now, lower debt over time, or flexibility to buy again. Our investment loans team can compare structures across lenders, and each has a cost or risk.
An offset account can reduce the interest charged because interest is calculated on the loan balance less the offset balance. It does not reduce the loan balance, and it does not lower the loan amount for the lender's loan-to-valuation ratio. Offset accounts may come with a higher rate or a fee, depending on the lender.
A fixed rate gives repayment certainty but may limit extra repayments and can involve break costs if you exit early. A variable rate offers more flexibility, but repayments can rise. Many investors split the loan to balance both.
What Deposit and Loan-to-Valuation Ratio Will You Need?
Lenders generally require lenders mortgage insurance when the loan-to-valuation ratio (LVR) is above 80 per cent. That 80 per cent figure is a common threshold, not a legal limit on borrowing.
Borrowing above it needs approval from both the lender and the insurer, and the premium is paid by the borrower. Maximum LVRs, minimum savings and whether the premium can be added to the loan all differ between lenders. Your investor deposit also needs to cover stamp duty and other purchase costs, and the NSW rules should be checked on the Revenue NSW website before you set a budget.
If you already own a home, you may be able to use equity as the deposit. Using equity increases your total debt, and the interest is deductible only to the extent the borrowed funds are used to produce rental income.
Using Equity: A Worked Example
Consider a Sydney homeowner who wants to buy a rental property and has built up equity in their current home. They plan to draw some of it for the deposit and use the rest for a cash buffer.
The broker reviews the structure and recommends setting up the equity as a separate loan split used only for the investment deposit. A split with a single purpose keeps the records clean for tax time. The investor's accountant can then confirm how much interest relates to the rental property. Under ATO guidance, deductibility depends on how borrowed money is used, so mixing personal spending into the same split would reduce the deductible portion.
The outcome is a cleaner application and a clearer tax record. The trade-off is higher total debt, so the lender tests the whole position at the buffered rate. The investor should speak with their accountant about the tax treatment of their own situation.
How Do Negative Gearing Changes Affect Your Application?
For properties acquired after 7:30pm AEST on 12 May 2026, the rules for using net rental losses change from the 2027-28 income year. Losses on established residential properties acquired after that time will be deductible only against other residential property income, and eligible new builds are treated differently.
Properties held at that time continue under the current rules. These changes affect how a rental loss is used, not whether interest is deductible. Lenders assess your borrowing on their own policies, so the tax rules are best discussed with your accountant before you choose between an established property and a new build.
What to Settle Before You Apply
Before applying, review your existing debts, confirm how your chosen lender treats rent, and decide on a loan structure. If you are replacing an existing loan, the refinancing page explains how that process works, and a loan health check can show whether your current setup suits your plans.
If you want to compare lenders and discuss your goals, call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
What interest rate do lenders use to test an investment loan application?
Banks must assess new borrowers at a rate at least 3.0 percentage points above the loan's rate. Non-bank lenders are not bound by this buffer but set their own policies.
How much rental income will a lender count?
APRA's view is that prudent policies count no more than 80 per cent of expected rent. Each lender sets its own treatment of rent and its own evidence requirements.
Does interest-only help me borrow more?
No. Lenders assess interest-only loans on principal and interest repayments over the remaining term, which gives a lower maximum loan than an equivalent principal and interest loan.
When is lenders mortgage insurance usually required?
It is generally required when the LVR is above 80 per cent. The premium is paid by the borrower, and approval is needed from the lender and the insurer.
