Top tips to manage risk on investment property loans

Managing risk on an investment loan is not about avoiding exposure. It is about structuring borrowing in a way that preserves flexibility, protects equity, and keeps you compliant when the rules change.

Serviceability is calculated at rates you will never pay

Every lender assesses your ability to repay an investment loan at an interest rate 3.0 percentage points above the product rate. If the variable rate on offer is 6.2 per cent, you will be tested at 9.2 per cent. That buffer has been mandatory since October 2021 and applies across all authorised deposit-taking institutions. The calculation is intended to ensure you can still meet repayments if rates rise sharply or rental income drops. Lenders do not waive this buffer, though some apply limited exceptions within strict internal risk limits. Fewer than 5 per cent of new loans fall into that category.

Consider an investor borrowing for a unit in South Perth with projected rental income of $650 per week. The lender will assess serviceability using the buffered rate, not the contract rate, and will typically include only 80 per cent of the projected rent. That means the investor must demonstrate capacity to service the loan on their other income sources alone, even if the property performs as expected. If your salary and existing commitments leave little room under that calculation, the amount you can borrow will be capped regardless of the property's yield.

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

From 1 February 2026, lenders may advance no more than 20 per cent of their new investor loans to borrowers with total debt of six times their gross income or more. The limit applies on a quarterly basis and is measured separately from owner-occupier lending. Bridging loans and new builds are excluded, but all other investor lending is captured.

If your gross income is $180,000 and your total debt, including the proposed investment loan, exceeds $1,080,000, you will fall into the high debt-to-income category. That does not make you ineligible, but it does mean the lender has a finite allocation for borrowers in your position. If that allocation is exhausted in a given quarter, your application may be delayed or declined even if you meet all other criteria. The rule does not apply to non-bank lenders, but those lenders may be brought under the same framework if regulators determine they are contributing to systemic risk.

Interest-only periods reduce cashflow pressure but increase capital requirements

An interest-only loan allows you to pay only the interest component for a set period, typically between one and five years. Repayments are lower during that period, which can improve cashflow and preserve tax deductions if the property is negatively geared. Once the interest-only period expires, the loan reverts to principal and interest repayments, and the monthly cost increases.

Under current prudential standards, an investment loan with an interest-only period longer than five years and a loan-to-value ratio above 80 per cent is classified as non-standard. Non-standard loans attract higher capital requirements for the lender, which usually translates to a higher interest rate or a requirement for a larger deposit. If the LVR is 80 per cent or below, or the interest-only term is five years or less, the loan can remain classified as standard.

An investor purchasing a property in Nedlands with a 15 per cent deposit would sit at an 85 per cent LVR. If they request a seven-year interest-only term, the loan will be non-standard and will carry a rate premium. Reducing the interest-only period to five years, or increasing the deposit to bring the LVR to 80 per cent, would reclassify the loan and reduce the cost.

Negative gearing is grandfathered, but only for properties held or contracted by 12 May 2026

Losses on residential investment properties you owned or had under contract at 7:30pm AEST on 12 May 2026 remain fully deductible against all income, including salary, until you sell. Properties acquired after that date and time are subject to new rules from the 2027-28 income year. Losses on those properties can be deducted only against income from other residential properties, including capital gains. Excess losses carry forward to future years but cannot be offset against wages or other non-property income.

Eligible new builds are exempt. If the property was constructed on vacant land or replaced an existing dwelling in a way that increased the total number of dwellings, it retains access to full negative gearing regardless of when it was purchased. Knock-down rebuilds that do not increase dwelling numbers, and renovations, do not qualify. If a new build is occupied for more than 12 months before being sold, the next buyer loses the exemption.

For properties purchased between 12 May 2026 and 30 June 2027, the old rules apply until 30 June 2027 only. From 1 July 2027, those properties are treated the same as any other post-12 May acquisition. Professionals building a portfolio with a mix of grandfathered and newly acquired properties need to model cashflow separately for each holding and understand that losses on newer properties will not reduce their tax on employment income.

Capital gains after 1 July 2027 are taxed under a split regime

For investment properties sold after 1 July 2027, gains that accrued before that date are taxed under the existing 50 per cent discount method. Gains that accrued from 1 July 2027 onward are taxed using cost base indexation and a 30 per cent minimum rate on the indexed gain. You can obtain a valuation as at 1 July 2027 to split the gain, or use an ATO apportionment method.

If you hold an eligible new build, you can choose at the time of sale whether to apply the 50 per cent discount or the indexed cost base with the 30 per cent floor. That choice allows you to optimise the tax outcome based on your marginal rate and the inflation rate over the holding period. Properties that are not eligible new builds do not get the choice and must use indexation for the post-1 July 2027 component of the gain.

The 30 per cent minimum applies only where your effective rate on the indexed gain falls below that threshold. If your marginal rate is 37 per cent or 45 per cent, the minimum has no effect. Investors receiving the Age Pension, Disability Support Pension or certain other payments in the year of sale are exempt from the minimum rate.

Offset accounts do not reduce your LVR for capital purposes

An offset account linked to your investment loan reduces the interest you pay, but it does not reduce the loan amount for the purpose of calculating the LVR under prudential standards. If you borrow $400,000 against a property valued at $500,000, your LVR is 80 per cent. If you then deposit $50,000 into an offset account, your interest cost falls, but your LVR remains 80 per cent. The lender's capital requirement is calculated on the gross loan amount, not the net position.

This distinction matters when you are trying to avoid lenders mortgage insurance or when you are approaching an LVR threshold that affects loan pricing. Paying down the loan principal will reduce your LVR. Holding funds in offset will not. Offset accounts remain useful for tax planning, because interest on investment debt is deductible and interest earned in offset does not increase the loan balance, but they do not improve your capital position with the lender or reduce LMI.

Foreign investment restrictions now run to mid-2029

Foreign persons, including temporary residents, are banned from purchasing established residential investment properties in Australia until 30 June 2029. The ban was originally scheduled to end on 31 March 2027 and was extended in the most recent Budget. Temporary residents can still apply for approval to purchase new dwellings, vacant land, or properties that fall within specific exemptions, such as large-scale build-to-rent developments or housing for workers under the Pacific Australia Labour Mobility scheme.

Application fees for exemptions were tripled from 1 April 2025, and enforcement funding has been increased. Foreign investors who acquire vacant land are generally required to complete construction within four years and cannot sell before construction is complete. Foreign owners who do not occupy or rent their property for at least 183 days in a vacancy year must pay a vacancy fee equal to double the foreign investment application fee that applied when the property was purchased.

Permanent residents and New Zealand citizens are not affected. If you hold temporary residency and are considering an investment purchase, the property must either be new or fall within a narrow exemption. Lenders will require evidence of foreign investment approval before settling the loan.

Portfolio lenders assess all your properties as a single exposure

When you apply to borrow for a second or third investment property, most lenders will assess your entire portfolio, not just the new acquisition. That includes re-testing the serviceability of your existing investment loans at the current buffered rate, even if those loans were approved years ago at lower rates. If your original borrowing was assessed at a 2.5 percentage point buffer and rates have since increased, the lender may determine that your existing commitments now absorb more of your serviceability than they did when the loans were first written.

Some lenders apply a portfolio approach that limits the total number of mortgaged properties or the total investment lending exposure they will carry for a single borrower. If you hold four financed investment properties and apply for a fifth, you may be declined on portfolio concentration grounds even if the individual property stacks up. Other lenders will continue to lend provided you meet serviceability and LVR requirements on a property-by-property basis. Knowing which lenders apply hard portfolio limits and which assess on a case-by-case basis is part of the structuring process.

Rate discounts narrow as your LVR and loan structure move away from the standard

Variable rate discounts are deeper for owner-occupiers paying principal and interest at low LVRs. Investment loans attract smaller discounts, and interest-only investment loans attract smaller discounts again. A principal-and-interest owner-occupier loan at 70 per cent LVR might receive a discount of 1.0 to 1.5 percentage points off the lender's reference rate. An interest-only investment loan at 85 per cent LVR might receive a discount of 0.3 to 0.5 percentage points, or none at all.

The difference is driven by the risk weight applied to the loan under the capital adequacy framework. Investment loans and interest-only loans require the lender to hold more capital, which increases the cost of funding. That cost is passed through to the borrower in the form of a higher rate. Fixed rates are priced off wholesale funding costs and do not carry the same discount structure, but investment fixed rates are still higher than owner-occupier fixed rates for the same reason.

If you are refinancing or structuring a new loan, the rate you are offered will depend on how the loan is classified. Moving from interest-only to principal and interest, or reducing your LVR by increasing your deposit, can shift the loan into a lower-risk category and improve the rate. The improvement is not always large enough to justify the additional capital outlay, so the decision needs to be modelled against your broader portfolio and cashflow position.

Call one of our team or book an appointment at a time that works for you. We will walk through your current position, model your options under the current prudential and tax settings, and structure your borrowing to keep your portfolio resilient.

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