Do you know when investment loans still stack up?

The 2026 Federal Budget changed how losses and capital gains are treated for established residential investment properties purchased after 12 May 2026. If you bought before that date, your arrangements stay as they were. If you're buying now, you need to work through different numbers.

How the tax treatment changed for new purchases

From 1 July 2027, losses on established residential properties purchased after Budget night can only be offset against rental income or capital gains from residential property, not against salary or other income. The 50% capital gains discount will be replaced with inflation-based indexation and a 30% minimum tax on gains. New builds remain eligible for the 50% CGT discount and full negative gearing, giving buyers of new construction a choice between the old and new arrangements.

Consider an investor who purchases an established property now. If the property runs at a loss of $8,000 per year due to loan repayments and other costs exceeding rental income, that loss can be carried forward and used to reduce tax on future rental income or capital gains from residential property. It cannot reduce taxable income from wages. The property may still deliver returns through capital growth and rental income over time, but the immediate tax benefit that previously reduced PAYG tax has been removed for this category of property.

What lenders look at when assessing investment loan applications

Lenders assess your ability to service an investment loan by calculating whether you can meet repayments on your existing debts plus the proposed loan, even if interest rates rise. They use a serviceability buffer, typically adding 2.5% to 3% above the actual interest rate, and assess the loan at principal and interest repayments even if you apply for interest-only. Rental income is included in the calculation, but most lenders apply a shading factor of around 80%, meaning they only count 80% of the expected rent to account for vacancy periods and maintenance costs.

Your borrowing capacity is also influenced by your existing debts, living expenses, and the loan to value ratio. If you're borrowing more than 80% of the property's value, Lenders Mortgage Insurance will apply, which increases upfront costs but allows you to proceed with a smaller deposit. Most lenders will lend up to 90% for investment purposes, though some will go to 95% in specific circumstances.

Interest-only or principal and interest for investment lending

Interest-only repayments are lower than principal and interest, which can improve cash flow in the early years of ownership. Most lenders offer interest-only periods of up to five years on investment loans, after which the loan reverts to principal and interest unless you request an extension. This structure can be useful if rental income only just covers costs, or if you plan to use surplus cash flow to pay down other debts or fund further property purchases.

Principal and interest repayments build equity faster and reduce the loan balance over time. If your goal is to own the property outright or reduce debt before retirement, principal and interest makes sense from the start. Lenders also assess serviceability more favourably on principal and interest loans, which can increase the amount you're able to borrow. The decision depends on your cash flow position, tax structure, and whether you're planning to grow a portfolio or hold a single property long-term.

Fixed or variable rates for property investment

Variable rates allow you to make extra repayments and access offset accounts, which can reduce the interest charged on your loan. If you're holding cash in an offset account linked to an investment loan, the interest saved is equivalent to earning interest at the loan rate, tax-free. This is particularly useful if you're holding funds for future purchases or managing irregular income.

Fixed rates lock in your repayment amount for a set period, typically one to five years. They remove the risk of rate increases during that time, but they also remove flexibility. Most fixed rate products do not allow extra repayments beyond a small annual cap, and they do not offer offset accounts. If you need to exit a fixed rate early due to sale or refinancing, break costs can apply. For investors who value certainty and are not planning to make extra repayments, fixed rates can provide stability. For those managing multiple properties or irregular cash flow, variable rates with offset typically offer more control.

Using equity to fund a deposit without selling

If you own a property that has increased in value, you can borrow against that equity to fund the deposit and purchase costs for an investment property. Lenders will typically allow you to borrow up to 80% of your existing property's value without paying Lenders Mortgage Insurance, though some will go higher if you're willing to cover the insurance cost.

As an example, if your home is worth $800,000 and you owe $400,000, you have $400,000 in equity. A lender may allow you to borrow up to 80% of the property's value, which is $640,000. Subtracting your existing loan leaves $240,000 in usable equity. After setting aside funds for purchase costs such as stamp duty and legal fees, the remainder can be used as a deposit on an investment property. This approach allows you to enter the investment market without saving a separate cash deposit, though it does increase your overall debt and must be carefully assessed for serviceability.

How borrowing capacity is calculated across multiple properties

When you apply for a second or third investment loan, lenders assess all your existing debts together. They calculate your net rental income after shading, subtract your living expenses and all loan repayments, and determine how much additional borrowing you can service. As your portfolio grows, even small increases in interest rates or reductions in rental income can affect your ability to borrow further.

Investors who want to continue building a portfolio often structure their loans to maximise serviceability. This can include paying down non-deductible debt first, holding loans on interest-only to reduce repayments during the assessment, and ensuring rental income is well-documented with lease agreements and bank statements. Working with a broker who understands portfolio lending can make a measurable difference to how much you can borrow and which lender is likely to approve your application.

What happens if you need to refinance an investment loan

Refinancing an investment loan typically occurs when a better rate or product becomes available, when a fixed rate period ends, or when you want to access equity for another purchase. Lenders will reassess your income, expenses, and serviceability using current criteria, which may be different from when you first borrowed. If your circumstances have changed, such as a reduction in income or an increase in living costs, you may not be able to borrow the same amount or access the same loan features.

If you're planning to refinance to access equity, allow time for a valuation and full application process. Most lenders require a new valuation of the property, and if the value has not increased as expected, the amount of equity available may be lower than anticipated. Refinancing costs including valuation fees, discharge fees from your current lender, and application fees with the new lender should be factored into your decision.

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