Do you know how investment loans work for rental property?

An investment loan is finance secured against a property you intend to rent out rather than live in.

Lenders assess your application differently to an owner-occupied home loan because rental income can fluctuate and vacancy carries risk. You will typically access lower borrowing capacity, face a slightly higher interest rate, and need a larger deposit to meet lender criteria. The upside is access to tax deductions on interest, holding costs, and potential capital growth in one of Melbourne's more tightly held bayside suburbs.

How lenders calculate rental income

Lenders use between 70 and 80 per cent of the expected rental income when assessing your borrowing capacity. The remaining portion is disregarded to account for vacancy risk, property management fees, and periods between tenants. In Caulfield South, where rental demand is supported by proximity to Monash University's Caulfield campus and the Glen Huntly Road precinct, vacancy periods tend to be shorter than in outer suburbs, but lenders apply the same discount regardless of location.

Consider a two-bedroom apartment near Caulfield Park that generates $550 per week in rent. A lender applying an 80 per cent rental income calculation would treat $440 per week as usable income when assessing your application. That $110 weekly buffer accounts for the expenses and risks specific to rental property ownership.

What deposit do you need?

Most lenders require a minimum 10 per cent deposit for an investment property, though some will lend at 90 per cent loan-to-value ratio with Lenders Mortgage Insurance. Borrowing above 80 per cent LVR triggers LMI, and the premium on an investment loan is higher than on an equivalent owner-occupied loan due to the increased risk weighting applied under prudential standards.

If you are purchasing a $900,000 townhouse in Caulfield South with a 10 per cent deposit, you would borrow $810,000 at 90 per cent LVR. LMI on that loan amount could add $25,000 to $35,000 to your upfront costs, depending on the lender and insurer. This premium can be capitalised into the loan, but doing so increases your total borrowing and ongoing repayments.

Interest-only or principal-and-interest repayments

Interest-only repayments allow you to pay only the interest portion of the loan for a set period, usually between one and five years. Your total repayment is lower during the interest-only period, which can improve short-term cash flow and maximise tax deductions if the property is negatively geared. Once the interest-only period ends, the loan reverts to principal-and-interest repayments, and your repayment amount increases.

Principal-and-interest repayments reduce the loan balance from day one, building equity with each payment. This structure suits investors focused on long-term wealth accumulation rather than tax minimisation. Under current prudential rules, lenders apply stricter serviceability assessments to interest-only applications, particularly where the loan-to-value ratio exceeds 80 per cent.

In our experience, investors purchasing in Caulfield South often start with interest-only repayments to preserve cash flow while the property establishes rental history, then switch to principal-and-interest once income stabilises or other debts are cleared.

Variable or fixed interest rates

A variable rate moves with the lender's assessment of funding costs and competitive positioning. You benefit when rates fall and have access to offset accounts and unlimited additional repayments. A fixed rate locks in your interest rate for a set term, typically between one and five years. You gain certainty over repayments but lose flexibility. Breaking a fixed rate early can trigger significant break costs, and most fixed-rate products do not offer offset accounts or allow additional repayments beyond a capped amount.

Some investors split their loan between variable and fixed portions to balance certainty with flexibility. For example, fixing 50 per cent of the loan amount provides partial protection against rate rises while keeping the remaining balance variable to access offset and repayment features. The refinancing process can become more complex with split loans if one portion is still fixed when you want to move lenders.

Debt-to-income limits and how they affect investors

From February 2026, lenders have been required to limit new loans to borrowers with total debt exceeding six times their gross annual income. Up to 20 per cent of new investor lending each quarter can go to borrowers above this threshold. If your total borrowing, including the proposed investment loan, exceeds six times your household income, you may still be approved, but your application will consume part of the lender's quarterly allowance. Some lenders tighten their policy settings well before reaching the regulatory cap.

A borrower earning $120,000 per year with an existing owner-occupied loan of $500,000 and seeking a $400,000 investment loan would have total debt of $900,000, or 7.5 times income. That application would require approval under the high-DTI allocation and may attract additional scrutiny or higher pricing.

Using equity from your existing property

If you own a property in Caulfield South or elsewhere with available equity, you can use that equity as a deposit for your investment purchase without needing to save additional cash. Equity is the difference between your property's current value and the amount you owe. Lenders will typically allow you to access equity up to 80 per cent of the property's value without LMI, or up to 90 per cent with LMI.

Assume your home in Caulfield South is valued at $1,400,000 and your remaining loan balance is $600,000. At 80 per cent LVR, the maximum lending against that property is $1,120,000. Subtracting your existing $600,000 loan leaves $520,000 in available equity. You could use $150,000 of that equity as a deposit and retain the remainder as a buffer for settlement costs, renovations, or future opportunities. The mechanics of releasing equity are handled through a refinance or top-up of your existing loan, secured by a first mortgage over your home and a second mortgage over the investment property, or through cross-collateralisation depending on lender and structure.

Tax treatment and the October 2026 changes

Interest on an investment loan is deductible against rental income and other assessable income, provided the property is rented or genuinely available for rent. Other holding costs, including council rates, insurance, property management fees, repairs, and depreciation, are also deductible. For properties purchased before 12 May 2026, losses can be offset against salary, business income, and other sources. Properties acquired after that date are subject to new rules limiting loss deductions to income from residential property only, with excess losses carried forward. Newly constructed dwellings remain exempt from the restriction.

Caulfield South has limited opportunity for new-build investment due to heritage overlays and established residential character, so most purchases will fall under the new negative gearing rules. Investors should model cash flow on the basis that losses will not reduce their tax payable on employment income once the rules take effect from the 2027-28 financial year.

Structuring your loan application

Lenders assess your capacity to service the investment loan using your gross income, existing debts, living expenses, and the net rental income from the property. They apply a serviceability buffer, currently set at 3.0 percentage points above the actual loan rate, meaning your income must be sufficient to service the loan at a notional rate well above what you will pay. The buffer exists to ensure you can continue servicing the loan if interest rates rise.

Before applying, gather recent payslips, tax returns, rental appraisals, and details of any other debts including credit cards, car loans, and existing mortgages. Lenders will also review your savings history, particularly if you are borrowing at high LVR. Working with a mortgage broker in Caulfield who understands lender policy differences can help you identify which lenders are more receptive to your income type, deposit source, and investment strategy.

Call one of our team or book an appointment at a time that works for you. We work with investors across Caulfield South and the wider Bayside area and can talk through your borrowing capacity, lender options, and the loan structure that fits your circumstances.

Frequently Asked Questions