Understanding the Basics of Property Investment Challenges

Purchasing a residential investment property involves far more than finding the right suburb and securing finance. Investors now face tighter serviceability assessments, lending caps based on total debt levels, and substantial tax reforms that change how rental losses and capital gains are treated.

How Serviceability Testing Affects Your Borrowing Power

Lenders assess all new investment loans at a rate at least 3.0 percentage points above the actual loan rate, regardless of whether you choose a variable or fixed product. A borrower applying for a loan at 6.5 per cent will be tested at a minimum of 9.5 per cent. Consider an investor who earns $120,000 annually and seeks to borrow $600,000 for a property in Truganina while maintaining a $450,000 owner-occupied loan. The combined repayments tested at the buffer rate, plus living expenses, reduce the available income far more sharply than many applicants expect. Rental income from the new property is included in the assessment, but lenders typically discount it by 20 per cent to allow for vacancy and maintenance costs. The outcome is that maximum borrowing capacity for investors has contracted materially compared to earlier years, particularly where existing debt is already high.

Debt-to-Income Limits and What They Mean for Portfolio Growth

From February this year, lenders can extend no more than 20 per cent of new investor loans to borrowers whose total debt is six times or greater than their gross annual income. If your household income is $150,000 and your combined home and investment borrowing totals $900,000 or more, you fall within the restricted portion of the lending pool. Lenders remain able to approve these applications, but they do so within a quarterly quota. Demand for this portion of the pool is high. In our experience, investors seeking to add a second or third property to their portfolio are more likely to encounter delays or require a larger deposit to bring the total debt ratio below the six-times threshold. Bridging loans for owner-occupiers and loans for newly constructed dwellings are excluded from the limit, but most purchases of established rental properties in the Western Suburbs are captured.

Interest-Only Loans and Risk Weighting Under Prudential Rules

An interest-only loan attracts a higher risk weighting under the capital adequacy rules that govern how banks price and allocate credit. A loan classified as interest-only for more than five years or with no specified end date to the interest-only period is treated as non-standard where the loan-to-value ratio exceeds 80 per cent. Lenders respond by charging a higher interest margin, reducing the maximum loan amount, or requiring a larger deposit. For an investor purchasing a $650,000 property in Melton with a 15 per cent deposit and seeking a ten-year interest-only term, the additional capital cost to the lender is passed through as a rate premium, typically between 0.3 and 0.7 percentage points above the standard variable investor rate. Offset accounts paired with interest-only lending do not reduce the loan amount for the purpose of calculating the risk weight, so the benefit of parking surplus funds in offset is limited to the interest saved rather than any improvement in the lender's capital position.

Negative Gearing Changes for Properties Acquired After May Last Year

Losses from established residential investment properties purchased after 7:30pm on 12 May 2026 can only be deducted against income from other residential properties from the 2027-28 financial year onward. Rental losses cannot be offset against salary, business income, or gains from non-residential assets. Properties held prior to that date and time, or under contract at that time, continue to allow full deductibility of rental losses against all income until the property is sold. Newly constructed dwellings that meet the definition of an eligible new build also retain full negative gearing, provided the build increases the total number of dwellings on the land and the property has not been occupied for more than 12 months before sale to the investor. As an example, an investor who purchases an established townhouse in Wyndham Vale in August this year will carry forward any rental loss to offset against future rental income or capital gains on residential property, but that loss will not reduce their taxable salary in the year it occurs. The restriction applies to individuals, partnerships, companies and most trusts, but widely held managed investment trusts are carved out.

Capital Gains Tax Indexation and the 30 Per Cent Minimum Rate

For the portion of any capital gain that accrues from 1 July 2027 onward, the previous 50 per cent discount is replaced by cost base indexation and a 30 per cent minimum tax rate on the inflation-adjusted gain. Investors will index the purchase price and eligible costs by CPI and pay tax only on real gains above inflation. The minimum 30 per cent rate applies where the investor's marginal rate on that portion of the gain would otherwise fall below 30 per cent. For a property purchased before 1 July 2027 and sold afterward, gains are apportioned between the pre-reform period, taxed under the existing discount rules, and the post-reform period, taxed under indexation. Investors may obtain a market valuation as at 1 July 2027 or apply a published apportionment method. Purchasers of eligible new builds can choose at the time of sale between the legacy 50 per cent discount and the new indexation treatment, selecting whichever delivers the lower tax. Recipients of the Age Pension, Disability Support Pension and certain other payments are exempt from the 30 per cent minimum rate in any year they receive those payments.

Lenders Mortgage Insurance Costs and LVR Thresholds

Lenders mortgage insurance is required on most residential investment loans where the LVR exceeds 80 per cent. The premium is calculated on a sliding scale based on loan amount and LVR, and the cost is borne by the borrower, either capitalised into the loan or paid upfront. For a $520,000 loan at 90 per cent LVR on an investment property, the LMI premium typically ranges from $15,000 to $22,000 depending on the insurer and lender. Stamp duty may apply to the premium in some states. Where the investor holds an existing property with available equity, releasing that equity to fund a deposit on the new purchase and avoid LMI is often more cost-effective than paying the premium, provided the borrowing capacity assessment supports the higher total debt. Offset balances do not reduce the outstanding loan amount for LVR calculation purposes under the prudential standards, so a $500,000 loan with $50,000 in offset is still treated as a $500,000 exposure when determining whether LMI is required.

Foreign Investment Restrictions on Established Dwellings

Foreign persons, including temporary residents, are banned from purchasing established residential dwellings until 30 June 2029, subject to limited exceptions. Temporary residents and foreign investors can still apply for approval to purchase new dwellings, vacant land for development, or invest in build-to-rent projects that meet the supply threshold. Application fees for established dwelling exceptions were tripled from April last year. Permanent residents and New Zealand citizens are exempt. Foreign owners of residential property must ensure the property is occupied or genuinely available for rent for at least 183 days each year, or pay an annual vacancy fee. For investors who hold Australian permanent residency or citizenship, these restrictions do not apply, but for those advising family members or business partners offshore, the compliance and enforcement measures have intensified materially, including audits targeting land banking funded through the last two Federal Budgets.

Rental Income Treatment and Vacancy Assumptions in Serviceability

Lenders include projected rental income in the serviceability assessment for investment property finance, but apply a discount, commonly 20 per cent, to account for vacancy, maintenance and management costs. A property in Point Cook with an expected rent of $550 per week will be assessed at $440 per week for serviceability purposes. Where the property is not yet tenanted, lenders require a rental appraisal from a licensed property manager or valuer. Properties in areas with higher vacancy rates or less diversified employment bases may attract a larger discount or additional scrutiny. Body corporate fees, council rates, insurance and interest are then deducted from the net rental income, and the residual, if positive, is added to the borrower's income. If the residual is negative, it is treated as an ongoing expense and reduces serviceability. The calculation is performed on a property-by-property basis, so investors with multiple properties must satisfy the test for each individually as well as in aggregate.

Refinancing Investment Loans and Access to Rate Discounts

Investors holding loans originated several years ago may be paying rates materially higher than those available to new borrowers. Refinancing an existing investment loan can deliver a lower rate, access to offset or redraw features, or consolidate multiple facilities. Lenders compete for refinance business and often provide rate discounts similar to those offered for new purchases, particularly where the LVR is below 80 per cent and the borrower has a strong serviceability position. Refinancing does not trigger the capital gains tax reforms or negative gearing restrictions, because the property acquisition date remains unchanged. An investor who purchased a property in Werribee in early 2025 and refinanced in late 2026 retains full negative gearing and the pre-July 2027 CGT discount for gains accruing up to that date. The refinance assessment is subject to the same serviceability buffer and debt-to-income limits as a new loan, so borrowers whose income or debt position has deteriorated may find their options constrained.

Call one of our team or book an appointment at a time that works for you to discuss your property investment scenario and the lending structures that align with the current regulatory and tax settings.

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