Beginner's Guide to Investment Loans in McKinnon

Buying an investment property in McKinnon means navigating a lending environment that has changed substantially in the past year. Tax rules that take effect from July 2027 now determine which properties qualify for negative gearing, serviceability buffers remain at 3 percentage points above the rate you pay, and debt-to-income caps limit how much lenders can advance if your borrowing exceeds six times your income.

The decision you face is whether the investment loan structure you arrange today will still support your goals when those rules take full effect, and whether the property type you choose will retain access to the tax treatment that makes the investment viable.

How Investment Loan Eligibility Works Under Current APRA Settings

Lenders assess your application using a serviceability buffer of 3 percentage points above the product rate. If you apply for a variable rate currently sitting around 6.3 per cent, your repayments are calculated at 9.3 per cent to confirm you can service the debt if rates rise. That buffer applies regardless of whether you select a fixed or variable rate.

The debt-to-income cap, which came into force in February, restricts lenders from funding more than 20 per cent of new investor loans at a DTI of 6 times or greater. If your total borrowing (including your home loan and the new investment loan) exceeds six times your gross annual income, your application will face additional scrutiny and may be declined even if your income can service the repayments at the buffered rate.

Consider a buyer who earns $140,000 and holds an existing home loan of $500,000. With borrowing already at 3.6 times income, an investment loan amount of $650,000 would push total debt to 8.2 times income, well above the DTI threshold. Unless the lender has capacity under its 20 per cent allocation, that application is unlikely to proceed regardless of rental income.

Interest Only or Principal and Interest for a New Investment Property

Interest only repayments reduce your monthly cash outflow and can improve serviceability when you are holding multiple properties. Most lenders offer interest only periods of up to five years on investment loans, after which the loan reverts to principal and interest unless you apply to extend.

The trade-off is that you are not reducing the loan amount during the interest only period, so the principal and interest repayments that follow are calculated over a shorter remaining term and will be higher than if you had been paying down the loan from the start. Lenders assess your ability to service the principal and interest repayments from day one, even if you elect interest only initially.

For properties acquired after 12 May 2026 that do not qualify as eligible new builds, the new negative gearing quarantine applies from 1 July 2027. If rental income does not cover interest and other claimable expenses, the shortfall can only be offset against other residential rental income or carried forward. Interest only repayments keep the interest expense higher for longer, which may increase the quarantined loss unless you hold other positively geared residential property.

What Counts as an Eligible New Build Under the Negative Gearing Rules

The tax changes grandfather properties held before 7:30pm AEST on 12 May 2026. For properties acquired after that date and time, negative gearing is quarantined unless the dwelling is an eligible new build.

An eligible new build is a dwelling constructed on previously vacant land, or a development that increases the total number of dwellings on the site. A knock-down rebuild that replaces one dwelling with one dwelling does not qualify. A substantial renovation of an existing dwelling does not qualify. A townhouse development that replaces a single dwelling with three townhouses does qualify.

If you buy an eligible new build and later sell it to another investor, the next purchaser loses access to negative gearing unless you sell within 12 months of the property first being occupied. This creates a secondary market discount for new builds that have been tenanted for more than a year, and it affects the resale value of the property when you exit.

Fixed or Variable Rate for an Investment Property in McKinnon

A variable rate gives you flexibility to make extra repayments or redraw funds without penalty, and it moves with the market. A fixed rate locks in your repayment for a set term, typically one to five years, but limits your ability to make additional payments and incurs break costs if you refinance or sell during the fixed period.

The decision depends on your cash flow, your tolerance for rate movements, and your plans for the property. If you intend to hold the property for a decade or more and your income is stable, a variable rate allows you to increase repayments when your cash flow permits and reduces the interest over the life of the loan. If your budget is constrained and you need certainty over the next two to three years, a fixed rate provides that certainty at the cost of flexibility.

Some investors split the loan amount between fixed and variable, locking in a portion of the debt while retaining access to redraw on the variable portion. This structure works when you expect irregular cash flow, such as annual bonuses or rental income from another property, and want the option to park those funds in the loan offset or redraw facility.

Calculating Borrowing Capacity When You Already Own a Home

Lenders calculate your borrowing capacity by taking your net income after tax, deducting your living expenses, and deducting the servicing cost of all existing debts at the buffered rate. For investment loans, lenders add rental income from the new property at a shaded rate, typically 80 per cent of the assessed rent to account for vacancy and maintenance.

If you own a home in McKinnon valued at $1,400,000 with a $600,000 loan and you want to buy an investment property, the lender will assess your existing loan repayments at the buffered rate of around 9.3 per cent, then calculate the new investment loan repayments at the same buffered rate. Rental income from the investment property is included at 80 per cent of market rent.

Your capacity is further constrained by the DTI cap if total borrowing exceeds six times your gross income. If you earn $180,000, your DTI limit is $1,080,000. With an existing $600,000 home loan, your maximum additional borrowing for the investment property is $480,000 before you hit the cap, assuming the lender has no allocation remaining for loans above the threshold.

Loan to Value Ratio and Lenders Mortgage Insurance on Investment Loans

The loan to value ratio is the loan amount expressed as a percentage of the property value. Most lenders will advance up to 90 per cent LVR on investment property, but borrowing above 80 per cent LVR attracts Lenders Mortgage Insurance, which is added to your loan amount or paid upfront.

LMI premiums for investment loans are higher than for owner-occupied loans. On an 85 per cent LVR investment loan of $700,000, LMI can exceed $20,000. On a 90 per cent LVR loan of the same amount, the premium can approach $40,000. The premium is not refundable if you refinance or sell within the first few years, and it does not reduce your ongoing interest expense.

If you hold equity in your McKinnon home, you may be able to use that equity as security for the investment property deposit rather than paying LMI. This is known as cross-collateralisation, and it allows you to borrow up to 80 per cent of the investment property value without LMI by pledging additional security from your home. The downside is that both properties are secured against both loans, which can complicate future refinancing or sale of either property.

Tax Deductions and Claimable Expenses on Investment Property

Interest on the investment loan is deductible to the extent the property is rented or held to produce rental income. Other claimable expenses include council rates, water rates, body corporate fees, property management fees, landlord insurance, repairs and maintenance, and depreciation on the building and fittings.

From 1 July 2027, if the property was acquired after 12 May 2026 and does not qualify as an eligible new build, any net rental loss is quarantined and cannot be offset against your salary or other non-residential income. The quarantined loss can only be offset against other residential rental income in the same year, or carried forward to offset future residential rental income or capital gains when you sell the property.

If you hold an investment property acquired before 12 May 2026, you may continue to offset net rental losses against your salary under the existing negative gearing rules until you sell. This grandfathering creates a material difference in after-tax cash flow between properties acquired before and after that date, and it affects the price buyers are willing to pay for established investment stock.

Investment Loan Refinance Options When Your Circumstances Change

Refinancing an investment loan allows you to access a lower rate, release equity for further investment, or restructure the loan to improve cash flow. Most lenders offer rate discounts to new customers that are not available to existing borrowers, and refinancing every few years can reduce your interest expense by 0.3 to 0.6 percentage points.

If you refinance from a fixed rate before the fixed term ends, you will incur break costs calculated by the lender based on the difference between your fixed rate and the wholesale rate for the remaining term. Break costs can run into thousands of dollars and may exceed the benefit of refinancing, particularly if the remaining fixed term is longer than 12 months.

If you are approaching the end of an interest only period, refinancing before the loan reverts to principal and interest can extend the interest only term for a further five years and maintain your cash flow. Most lenders will require a current valuation and reassess your serviceability, so your capacity to extend interest only depends on whether your income and equity position still support the loan amount.

Call one of our team or book an appointment at a time that works for you. We can structure an investment loan application that fits your goals and compare investment loan options from banks and lenders across Australia to make sure you are not leaving rate discounts or loan features on the table.

Frequently Asked Questions