Understanding the basics of Investment Loans

What is an Investment Loan and How Does It Differ from a Home Loan?

An investment loan is a mortgage product used to purchase a property you intend to rent out rather than live in. Lenders assess these applications differently because the risk profile differs from owner-occupied lending. Most lenders price investor products at a rate premium of 0.20 to 0.40 percentage points above comparable owner-occupier rates. Serviceability tests are also stricter, with rental income discounted to account for potential vacancy periods and property management costs.

Consider a buyer in Bennett Springs looking at a unit as their first investment. The lender will assess their capacity using their salary, existing commitments and the expected rental income from the unit. That rental income is generally shaded by 20 per cent to account for vacancies, meaning if the property could achieve $400 per week, the lender might only count $320 per week in the serviceability calculation. This discount reflects the reality that not all rental properties are tenanted year-round.

Under APRA's current framework, lenders must assess all new borrowers' capacity to service a loan at an interest rate at least 3.0 percentage points above the product rate. For someone applying for an investment loan at current variable rates, that means proving you can afford repayments at a rate closer to 9 or 10 per cent, even if the actual rate is lower. Combined with the rental income shading, this often means investors can borrow less for an investment property than they could for an owner-occupied home on the same income.

How Much Deposit Do You Need for Your First Investment Property?

Lenders mortgage insurance is generally required by lenders on residential loans where the loan-to-value ratio exceeds 80 per cent. For an investment property, that means a deposit of at least 20 per cent is typically required to avoid LMI. Some lenders will accept a 10 per cent deposit with LMI, but the premium can add several thousand dollars to the upfront cost, and not all lenders offer LMI on investment loans above 80 per cent LVR.

Bennett Springs attracts a mix of owner-occupiers and investors due to its location between the Swan Valley and Ellenbrook, with good access to Tonkin Highway and proximity to schools and light industrial employment in Malaga. Properties here tend to suit first-time investors because entry prices remain moderate compared to inner suburbs. A buyer with equity in an existing owner-occupied home can often use that equity as part or all of the deposit, rather than needing to save additional cash.

In a scenario where someone owns a home in Bennett Springs and wants to buy a second property as an investment, the lender will assess whether there is enough usable equity to cover the 20 per cent deposit plus costs. If the existing home is valued at $500,000 with a remaining loan balance of $300,000, there is $200,000 in equity. Lenders typically allow you to borrow up to 80 per cent of the value of the existing property, meaning up to $400,000. With $300,000 already borrowed, that leaves $100,000 in usable equity. After allowing for costs and retaining a small buffer, this might cover the deposit on an investment property at the suburb's current median, without needing to sell or add further savings.

Should You Choose Variable, Fixed or Interest-Only Repayments?

Variable rate loans allow you to make extra repayments and generally offer offset account facilities, while fixed rate loans provide certainty over repayments for a set term. For investors, the choice often comes down to cash flow management and tax planning. Interest-only repayments reduce the monthly commitment, which can be attractive if rental income does not fully cover the mortgage. Principal and interest repayments build equity faster but reduce the immediate tax deduction, because only the interest portion is deductible.

Under APS 112, a long-term interest-only residential loan is classified as non-standard where the LVR is greater than 80 per cent and the contractual interest-only period is greater than five years or is not specified. Most lenders now offer interest-only periods of up to five years on investment loans, after which the loan reverts to principal and interest. During the interest-only period, your repayments are lower but the loan balance does not reduce. Once the loan switches to principal and interest, monthly repayments increase, sometimes significantly, so it's important to plan for that transition.

For someone purchasing their first investment property in Bennett Springs, starting with a variable rate and interest-only repayments for the first few years can provide flexibility while they adjust to managing a rental property. An offset account linked to the loan allows any surplus income to sit against the loan balance, reducing interest without formally paying down the principal. This keeps funds accessible if needed for property maintenance or other expenses, while still minimising the interest cost.

What are the Current Lending Restrictions on Investment Loans?

APRA activated a debt-to-income lending limit on 27 November 2025, effective from 1 February 2026, allowing each lender to lend up to 20 per cent of new investor loans to borrowers with a total DTI ratio of six times or greater. This means if your total borrowings across all loans, including the new investment loan, are more than six times your gross annual income, your application may fall into the restricted portion of the lender's lending book. Not all lenders will approve loans in this category, and those that do may apply higher rates or stricter conditions.

For a buyer in Bennett Springs earning $90,000 per year, a total debt load above $540,000 would trigger the DTI threshold. If they already have a home loan of $350,000 and are looking to borrow another $250,000 for an investment property, their total debt would be $600,000, putting them above six times income. This does not automatically mean the application will be declined, but it does mean the lender will assess the application more carefully and may apply higher scrutiny to income and expense verification.

The DTI limit applies separately to investor and owner-occupier lending, so the restriction is calculated based on your total debt, not just the investment portion. Some lenders are more conservative than others in how they manage their allocation of high-DTI lending. Working with a mortgage broker in Bennett Springs who understands each lender's approach can make a material difference to whether an application is approved and on what terms.

How Do Recent Tax Changes Affect Your Investment Property Purchase?

Under the Income Tax Assessment Act 1997, losses from residential investment properties held at 7:30pm AEST on 12 May 2026, including properties under contract awaiting settlement at that time, continue to be fully deductible against other income until the property is sold. From the 2027-28 income year, losses related to established residential investment properties acquired after 7:30pm AEST on 12 May 2026 are deductible only against other income from residential properties, including capital gains on residential properties. This means if you purchase an established property now, any loss you make in future years can only be offset against income from other residential investments, not against your salary.

Eligible new builds include dwellings constructed on previously vacant land and dwellings replacing existing properties where the number of dwellings increases. If you buy an eligible new build, the previous negative gearing rules continue to apply, allowing you to offset losses against all income. Bennett Springs has seen some new townhouse and villa developments in recent years, particularly on subdivided blocks near the eastern edge of the suburb. Purchasing one of these properties as your first investment may provide a different tax outcome compared to purchasing an established home.

For someone weighing up an established villa versus a new townhouse in the same street, the tax treatment is now a relevant factor. If the established villa produces a loss of $5,000 per year after deducting interest, rates, insurance and other costs, that loss can only be carried forward or offset against future residential property income. If your marginal tax rate is 32.5 per cent, that loss would previously have reduced your tax by $1,625 per year. Under the new rules, you will not receive that benefit until you sell the property or earn income from another residential investment. The new townhouse, if it qualifies as an eligible new build, would still allow the full deduction against salary.

What Are the Ongoing Costs Beyond the Mortgage Repayment?

Interest on borrowings used to acquire or hold residential rental property is deductible against assessable income to the extent the property is rented or held to produce assessable income. Other holding costs are also deductible, but they still need to be paid from your cash flow. Council rates in Bennett Springs are levied by the City of Swan and vary depending on the property's gross rental value. Water rates, insurance, property management fees if you use an agent, strata fees for units or townhouses, and occasional maintenance costs all add up.

A unit in one of the Bennett Springs complexes might have body corporate fees of $400 to $600 per quarter, covering common area maintenance, insurance for the building and reserve fund contributions. If you engage a property manager, the fee is typically 7 to 9 per cent of the weekly rent plus leasing fees when a new tenant is found. On a property renting for $400 per week, that's roughly $30 per week or $1,560 per year in management fees alone. Add rates, insurance and strata fees, and the annual holding cost can easily reach $6,000 to $8,000 before the mortgage repayment.

Buyers often focus on whether the rent covers the mortgage repayment, but the full picture includes all these other costs. If the rent is $400 per week and the interest-only repayment is $380 per week, the property looks neutrally geared on the surface. Once you include rates, insurance, strata and management, the property is negatively geared by several thousand dollars per year. That is not necessarily a problem if you have planned for it and have the income to support the shortfall, but it's important to go into the purchase with a clear view of the real cash flow.

If you are considering your first investment property and want to understand how the numbers stack up in your situation, call one of our team or book an appointment at a time that works for you.

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