ADIs must test whether your income can cover repayments at a rate at least 3.0 percentage points above the loan rate. This is one of several things a lender checks, alongside your debts, deposit and the property.
If you are a Mayfield buyer or owner weighing up your first investment property, this article shows you how a lender reads your numbers and what you can fix before you apply.
How Do Lenders Assess an Investment Loan Application?
Lenders assess an investment loan by testing whether your income can cover the repayments at a higher rate than the loan's actual rate, after counting your existing debts. For banks, credit unions and building societies (known as ADIs), APRA requires this test to use a rate at least 3.0 percentage points above the loan rate.
That buffer applies to ADIs only. Non-bank lenders are not bound by it, although each lender still sets its own credit policy. A broker can compare how different lenders treat your situation. Our borrowing capacity page explains how your figures translate into a likely loan amount.
Existing debts matter too. Lenders ask about the balance, rate and remaining term of every loan you hold. For credit cards, they can apply a notional repayment based on the card limit, not the balance. Some lenders assess cards on the limit, so a lower limit may increase borrowing capacity at those lenders. Check with your broker first.
How Much Rental Income Will a Lender Count?
APRA's guidance says prudent lenders count no more than 80 per cent of expected rent. The 20 per cent haircut allows for periods when the property sits empty.
That haircut is not for management fees, repairs or other holding costs. Lenders also tend to place less weight on a rental appraisal than on actual rent received. Each lender sets its own rules on what rental evidence it accepts, so the same property can produce different results at different lenders.
As an illustrative example, suppose an investor expects $500 a week in rent. At 80 per cent, the lender counts $400 a week toward the application. The other $100 is ignored for the assessment, even if the tenant pays it every week.
Does an Interest-Only Loan Increase Your Borrowing Power?
No. An interest-only loan does not increase how much you can borrow. APRA expects lenders to assess interest-only loans on principal and interest repayments over the remaining term after the interest-only period ends.
Take a 30-year loan with a 5-year interest-only period. The lender tests it as if you will repay principal and interest over the final 25 years. The shorter repayment window means the assessed repayment is higher, so your maximum loan size can be lower than on a standard principal and interest loan.
The trade-off is that you do not reduce the loan balance during the interest-only period. You owe the same amount at the end of it, and repayments rise when principal and interest begin. Use our mortgage repayment calculator to compare both structures before choosing.
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How Do LVR and Lenders Mortgage Insurance Affect Your Deposit?
Lenders generally ask for lenders mortgage insurance (LMI) when your loan to value ratio (LVR) goes above 80 per cent. That 80 per cent line is the point where LMI is generally required. It is not a legal limit on how much you can borrow.
The borrower pays the LMI premium. It is calculated on a sliding scale based on the loan amount and LVR. Borrowing above 80 per cent needs approval from both the lender and the insurer, and each applies its own criteria.
The trade-off is cost against timing. A larger investor deposit can avoid LMI altogether. A smaller deposit gets you into the market sooner but adds an insurance cost. Lenders set their own deposit minimums and maximum LVRs, so the right mix depends on the lender you choose.
Using Equity From Your Mayfield Home as an Investor Deposit
You can use equity in a property you already own as your deposit, but only up to the limit your lender approves. Each lender sets its own approach to valuing your existing property and how much equity it will release, and borrowing that takes you above 80 per cent LVR needs lender approval and LMI approval.
How you use the money affects tax. The ATO decides deductibility by what the borrowed funds are used for. Money borrowed against your home and spent on an investment property can have deductible interest, but money used for private purposes does not. Keep investment borrowing in a separate loan split so the purpose is clear. Separate splits for borrowing used for investment can help record the purpose of each drawdown. Speak with your accountant about your own position. If you want a broader look at structuring, see our investment loans page.
How Does an Investment Loan Look in Dollars?
To see the effect of the repayment type, compare two loans of $600,000 at an illustrative rate of 6.75% p.a., which is an example only and not a current offer.
On interest only, the annual interest is $40,500, or about $3,375 a month. On principal and interest over 30 years, the monthly repayment is about $3,891. The difference is about $516 a month, and the interest-only loan has not reduced the balance at all.
If the interest-only period ran for 5 years, the loan would then need to be repaid over the remaining 25 years. At the same 6.75% rate, the monthly repayment on $600,000 would rise to about $4,145. Lenders test your ability to pay that higher figure at the start.
Only the interest portion is tax deductible on an investment loan. The principal portion is not. Ask your accountant how this applies to you.
What Tax Changes Should Mayfield Investors Know About Before Buying?
Negative gearing rules now depend on when you buy and what you buy. Losses on residential properties held at 7:30pm AEST on 12 May 2026 can still be deducted against other income, as can losses on eligible new builds acquired after that date.
From the 2027-28 income year, net rental losses on established residential properties acquired after that time can only be deducted against other residential property income, including capital gains on residential property. Excess losses can be carried forward. From 1 July 2027, the 50 per cent CGT discount is replaced by cost base indexation and a 30 per cent minimum tax rate on gains that accrue from that date.
These changes affect how you plan your cash flow, so speak with your accountant before you sign a contract. Your broker can then structure the loan around that advice. Our home loans team can also review your existing loan if you plan to release equity.
Talk to a Mayfield Mortgage Broker Before You Apply
A broker can check your numbers against lender policy before you apply, which may reduce the chance of a decline. Our Mayfield mortgage broker page has more on how we work with local clients. Call one of our team or book an appointment at a time that works for you, and we will map out a clear path to approval.
Frequently Asked Questions
How do lenders assess an investment loan?
ADIs must test whether your income can cover repayments at a rate at least 3.0 percentage points above the loan rate. Non-bank lenders are not bound by this buffer but set their own credit policy. Your existing debts are also counted.
How much rent will a lender count?
APRA's guidance says prudent lenders count no more than 80 per cent of expected rent. Each lender sets its own rules on rental evidence.
Does interest-only increase how much I can borrow?
No. Lenders assess interest-only loans on principal and interest over the remaining term after the interest-only period. This can lower your maximum loan size.
When do I need lenders mortgage insurance?
LMI is generally required when your LVR is above 80 per cent. The premium is paid by the borrower and depends on the loan amount and LVR.
Is all investment loan interest tax deductible?
Interest is deductible to the extent the funds are used for a rental property. The principal part of a repayment is not deductible. Confirm your position with your accountant.
