Smart ways to approach investment loan applications

You cannot lodge an investor loan application the same way you would lodge a home loan application.

Lenders assess investment loans differently because the debt sits alongside your personal living costs. The property might be rented out, but you still need to prove you can carry the repayments if the place sits empty for three months. That calculation matters more than the rental income in most lender policies.

Consider someone in Riverside looking to buy a second unit in the older blocks near the Tamar. They earn $95,000 a year, rent where they live, and want to hold the investment long-term using a variable rate. The property rents for $420 a week. The lender does not add $420 a week to their income. Instead, it applies a vacancy rate, often 20 per cent, reducing the usable rental income to $336 a week. Then it stress-tests the loan repayments at the product rate plus 3.0 percentage points. The investor needs to service that higher rate from their salary and the reduced rental income combined. Most knockbacks happen because applicants assume the rent will do more heavy lifting than lenders allow.

Rental income is shaded, not counted in full

Lenders apply a discount to rental income before they include it in your serviceability calculation. The discount accounts for vacancy periods and non-payment risk. Twenty per cent is common, though some lenders use 25 per cent. If your property achieves $500 a week in rent, the lender might credit you with $400 a week, or less.

The discount does not change based on how tight the Riverside rental market is right now. It stays the same across the lender's policy. A broker can show you which lenders apply the lowest shading percentage if your borrowing capacity sits close to the edge, but the difference rarely exceeds 5 per cent.

The deposit requirement includes more than the property price gap

Most lenders require at least a 20 per cent deposit for an investment loan to avoid Lenders Mortgage Insurance, though some will lend at higher loan to value ratios if the borrower pays the LMI premium. The 20 per cent is measured against the purchase price or valuation, whichever is lower.

You also need to cover stamp duty, legal fees, building and pest reports, and any adjustments for rates or body corporate levies. For an older two-bedroom unit near the Riverside shops, those settlement costs might add another $15,000 to $20,000 depending on the contract terms and whether you use a conveyancer in Launceston or closer to home.

If you are refinancing an existing home to release equity and use that equity as your deposit, the lender will assess both loans together. Your borrowing capacity shrinks because the debt against your home increases. Releasing $80,000 in equity might fund your deposit, but it could reduce your maximum investor loan amount by $60,000 or more depending on your income.

Lenders apply a serviceability buffer that does not match the actual rate

Every lender must assess your ability to repay the loan at a rate that is at least 3.0 percentage points above the actual product rate. If the variable rate on the investor loan is 6.2 per cent, the lender tests your income against a rate of 9.2 per cent or higher. Some lenders add more than the minimum buffer.

The buffer applies to new loans only. If you hold an existing investment loan and apply to increase the limit or add a second property, the new borrowing is tested at the higher rate, but your current loan is assessed at its actual rate plus the buffer.

Debt-to-income limits now apply separately to investor loans

From February this year, each lender can write no more than 20 per cent of its new investor loans to borrowers whose total debt sits at six times their gross income or more. The limit is measured quarterly and applies across the lender's entire book, not to you individually.

If your income is $100,000 and your total borrowing, including your investor loan, would reach $600,000 or more, you may find that some lenders decline your application even though your serviceability is fine on paper. The lender has already filled its quota for high debt-to-income loans that quarter. A broker can redirect your application to a lender that still has capacity, or wait until the next quarter if timing allows.

Interest-only periods reduce your repayment but increase the lender's risk weighting

An interest-only loan means you pay only the interest portion each month, and the loan balance does not reduce. Investors often choose interest-only terms because the repayment is lower, and all the interest is deductible if the property is rented out or genuinely available for rent.

Lenders apply higher risk weightings to interest-only loans under the prudential standard that governs capital adequacy. The higher weighting can affect pricing, and some lenders cap the interest-only period at five years for loans above an 80 per cent loan to value ratio. If you want a longer interest-only term or a higher loan to value ratio, expect either a higher rate or a requirement to switch lenders when the interest-only period ends.

Established properties acquired after May last year face different tax treatment from July next year

If you bought an established investment property in Riverside after 12 May last year and settlement occurred after that date, you can still deduct the interest and other holding costs against your salary this financial year. From the start of the next financial year, any loss from that property can only be offset against income from other residential property, including capital gains when you sell. You can carry forward unused losses to future years, but you cannot use them to reduce your tax on wages.

New builds, including new townhouses being developed near the old Riverside Primary School site, remain fully deductible against all income even if purchased after May last year. If you are weighing up an established unit against a new townhouse and your income is high enough that negative gearing saves you several thousand dollars a year, the difference in tax treatment might cover the price gap between the two properties over a few years.

Lenders want to see a clear reason you are buying this property as an investment

If your application shows you live in Launceston and you are buying a property in Riverside to rent out, the lender accepts that as an investment loan application. If you currently rent in Riverside and you are buying a property two streets away, also to rent out, the lender may ask why you are not planning to live there yourself. The question matters because owner-occupier loans attract lower rates and lower risk weightings than investor loans.

You do not need to prove the property will never become your home, but you do need to show genuine intent to rent it out when you lodge the application. A signed property management agreement or a letter from a local agent estimating the rental yield usually satisfies the lender. If you are buying in the same suburb where you currently rent, a broker can help you document the investment intent clearly before the application is submitted.

Your current debt sits in front of the new loan when capacity is calculated

Lenders assess all your existing commitments before they calculate how much you can borrow for an investment property. Credit card limits are counted in full even if the balance is zero. Personal loans, car loans and Buy Now Pay Later accounts all reduce your borrowing capacity, often by more than you expect.

A $10,000 credit card limit might reduce your maximum loan amount by $40,000 or more depending on the lender's assessment rate. If you hold cards you no longer use, closing them before you apply can increase your borrowing capacity without changing your income. A borrowing capacity calculation before you start looking at properties shows you where you stand and whether any adjustments are worth making.

Call one of our team or book an appointment at a time that works for you. We work with investors across Riverside and know which lenders still have room under the debt-to-income limits and how to structure applications when rental income alone will not cover the gap.

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