Unlock the Secrets to Investment Loan Challenges

Property investment in Caulfield South remains attractive for its proximity to elite schools, Caulfield Racecourse and Monash Medical Centre, but securing an investment loan now involves different challenges than it did even two years ago.

APRA's serviceability buffer, debt-to-income caps and proposed changes to negative gearing and capital gains tax have reshaped how lenders assess risk and how borrowers structure their purchase. Add rising vacancy rates in parts of inner Melbourne and you're navigating a more complex approval process than many investors expect.

Serviceability Buffer and Debt-to-Income Limits

Lenders must assess your repayment capacity at least 3.0 percentage points above the actual loan rate, and no more than 20 per cent of their investor lending can exceed a debt-to-income ratio of six times gross income. These two measures apply to all ADI lenders and work together to cap how much you can borrow, regardless of your equity position. Consider a buyer with $180,000 household income looking to purchase a two-bedroom unit near Glen Huntly Road. With existing debt of $650,000, they sit at a debt-to-income ratio of 3.6 before adding the new loan. A $550,000 purchase would push the ratio to 6.7, exceeding the threshold. The lender can still approve the loan, but it counts toward their 20 per cent cap, which may result in a declined application if that lender is already close to their limit for the quarter. The borrower might need to increase their deposit, reduce the purchase price, or apply through a non-bank lender that isn't subject to APRA's debt-to-income restriction. Non-bank lenders still apply the serviceability buffer, but they retain more discretion on total debt levels.

Deposit and LMI Costs for Established Property

Most ADI lenders now require a 20 per cent deposit for established residential investment property to avoid Lenders Mortgage Insurance. If you proceed with a smaller deposit, LMI premiums are higher for investor lending than for owner-occupiers, and capitalising the premium into the loan increases your loan-to-value ratio further. A 10 per cent deposit on a $700,000 property results in a base LVR of 90 per cent, but once the LMI premium of approximately $30,000 is added, the effective LVR climbs above 94 per cent. Many lenders cap investor LVR at 90 per cent including LMI, meaning you would need to contribute more cash upfront or seek a lender with a higher maximum. Using equity from your home in Caulfield South can cover the deposit and costs, but lenders assess the combined exposure across both properties and apply the serviceability buffer to the total debt.

Rental Income and Vacancy Assumptions

Lenders typically assess 80 per cent of projected rental income when calculating serviceability, which accounts for vacancy periods, maintenance and letting costs. If you're purchasing a one-bedroom unit near Caulfield station with an expected rent of $450 per week, the lender includes $360 per week in the assessment. In a scenario like this, the income offset is modest, and if you hold the property interest-only, the shortfall between rental income and loan repayments is funded from your salary. If vacancy rates in the immediate area are elevated, some lenders apply a lower rental assessment or request a signed lease before settlement. APRA does not mandate a specific vacancy discount, but individual lender policy varies and can affect your borrowing capacity by tens of thousands of dollars.

Negative Gearing and Proposed Policy Changes

Negative gearing allows you to offset rental losses against your taxable income. Under proposed legislation, this will be limited to new builds from 1 July 2027 if you purchase an established property after 12 May 2026. Losses on established properties acquired after that date will be quarantined and only deductible against future rental income or capital gains from residential property. If you already own an established investment property or acquire one before the cutoff, existing negative gearing treatment continues until you sell. The changes don't apply retrospectively, but they do influence purchasing decisions now. A two-bedroom townhouse classified as a new build retains full negative gearing treatment and may also qualify for stamp duty concessions, depending on state policy. The definition of new build requires the property to genuinely add to housing stock and not have been previously sold, unless the first owner was the builder and the property remained unoccupied for no more than 12 months. If you're weighing an established apartment against a new build, the after-tax position over five to ten years will differ substantially once the policy takes effect, assuming it passes.

CGT Discount and Indexation Method

The 50 per cent capital gains tax discount is proposed to be replaced with cost base indexation using the Consumer Price Index, with a minimum 30 per cent tax rate on real gains. The change applies only to gains accruing from 1 July 2027, meaning gains up to that date retain the existing discount. If you purchase a property now and sell it in ten years, you calculate the gain in two parts: the portion from purchase to 30 June 2027 uses the 50 per cent discount, and the portion from 1 July 2027 onward uses indexation. Investors purchasing a new build may choose between the 50 per cent discount and the indexation method for the post-2027 component, which provides some flexibility depending on inflation outcomes. The interaction between quarantined losses and indexed gains adds complexity, and the tax outcome depends on your marginal rate, holding period and the timing of other capital events. Modelling the scenarios with a licensed tax adviser before committing to a purchase is now part of the due diligence process.

Interest-Only Versus Principal and Interest

Interest-only periods for investment loans typically run for one to five years, after which the loan reverts to principal and interest unless you request an extension. Lenders assess serviceability on a principal and interest basis even if you select interest-only, so the repayment type affects cash flow but not borrowing capacity. Choosing interest-only keeps repayments lower during the holding period, which can improve your ability to service additional debt if you plan to grow your portfolio. Once the interest-only term expires, repayments increase substantially because the principal is amortised over the remaining loan term. If you hold a 30-year loan with a five-year interest-only period, the principal is repaid over 25 years, lifting monthly repayments. Lenders may allow you to extend the interest-only term, but policy varies and repeat extensions are less common than they were before APRA's serviceability measures tightened. Structuring the loan correctly from the outset, including the split between fixed rate and variable rate, determines how much flexibility you retain later.

Refinancing to Manage Rate Increases

If your investment loan rate has increased or your fixed term has expired, refinancing can reduce repayments and release equity for further purchases. Lenders reassess your income, existing debt and property values at the time of refinance, and the serviceability buffer applies again. If your income has remained flat but your debt has grown, you may not qualify for the same loan amount you hold now. Conversely, if the property in Caulfield South has appreciated and your equity position has improved, you can access that equity without selling, subject to lender LVR limits. Refinancing also offers an opportunity to restructure your loan, for example moving from a single variable facility to a split arrangement that locks in part of the balance while retaining offset access on the variable portion. Rate discounts vary significantly between lenders, and broker access to wholesale or portfolio deals can result in pricing that isn't advertised on aggregator sites. Timing the refinance to avoid break costs on a fixed loan requires planning, but the potential saving over the remaining loan term usually justifies the effort.

Property investment in Caulfield South continues to deliver long-term wealth outcomes, but the path to approval now involves more moving parts than before. Understanding how serviceability rules, deposit requirements and proposed policy changes interact with your specific situation allows you to structure your application for the outcome you want.

Call one of our team or book an appointment at a time that works for you to discuss your investment loan options and how we can structure your application to meet lender criteria.

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