Investment lending is where I see the most people working off information that was true a few years ago and is not true now. It is also where the math behaves differently enough from a normal home loan that intuition tends to let people down.
Here is how the banks actually look at it.
The rent counts, but not all of it
The obvious thought is that if the property rents for $600 a week, that is $600 a week of income going towards the loan. Banks do not see it that way.
They scale the rent, meaning they only count a portion of it in your assessment. As a rough rule of thumb, expect somewhere around 80% of the gross rent to be counted, though it does vary between banks and it is one of the reasons the same application can get quite different answers depending on who is looking at it.
That shading is not the bank being pessimistic about your tenant. It is a rough allowance for the costs that come with owning a rental: vacancy between tenants, property management fees if you use one, maintenance, and the occasional expensive surprise. Anyone who has owned a rental for a few years will tell you that the allowance is not unreasonable.
So when you are doing your own sums, use a shaded figure rather than the full rent. It will get you much closer to the answer the bank gives you.
Everything else still applies
The shaded rent goes into the same assessment as the rest of your position, and the same tests apply.
Affordability is still measured at a rate above the one you would actually pay, generally around two percent above the current two year fixed rate. Your existing home loan, your car finance, your credit card limits and your living costs all still come off the top. The rental income helps, but it is added to your position rather than assessed in isolation, which surprises people who expect the property to be judged on whether it pays for itself.
The debt to income restriction applies too, set at seven times gross income for investors rather than the six that applies to owner-occupiers. That is more room, but investors also tend to carry more debt, so it bites more often than you would think. As with owner-occupier lending, it is a limit on how much of this lending the bank can write rather than a hard prohibition on you, so being slightly over it is not an automatic decline.
Deposit is the other big one, and the requirement for an investment property is meaningfully higher than for the home you live in. New builds are often treated more favourably. Those settings get adjusted from time to time, so rather than quote a figure that might be out of date by the time you read this, ask and we’ll tell you where things sit today.
The option most people have not thought about
A lot of the conversations I have about investment property start with someone assuming they need to find a fresh deposit for a second house.
Often there is another way in. If you are moving anyway, keeping your current home and renting it out instead of selling it puts you in the same position as buying an investment, just approached from the other end. You already own the property, you already know what it needs, and the equity you have built in it can help fund the next purchase.
The assessment works exactly the same way. The bank shades the rent you would get on the old place, counts your existing loan against you, and looks at whether the whole picture stacks up. What is different is the practical side. There is no hunting for a property, no second set of purchase costs, and you are keeping an asset in a location you actually know.
It does not suit everyone. Sometimes the house you have lived in makes a poor rental, or the equity is better used as a deposit on the new place, or you simply want a clean break. But it is worth running the numbers on before you list, because once it is sold the option is gone.
Spare rooms to add income
Boarder and flatmate income can generally be used in an assessment on the home you live in, provided you genuinely have the spare rooms. If the house you will live in is three or four bedrooms and it is just you, or you and a partner, that is real income the bank may count towards your borrowing even if you are buying an investment property as well.
The tax side, which is not my lane
Interest deductibility, how rental income is taxed, what you can and cannot claim, whether the property should sit in a trust or a company or your own names. All of this genuinely affects whether an investment works for you, and the rules in this area have changed more than once in recent years.
We are not tax advisers and we’re not going to pretend otherwise. What we would say is that the tax treatment is a real part of the decision and not an afterthought, so talk to your accountant before you buy rather than after.
What we can do is tell you what the banks will lend and how they will assess it, which is usually the constraint that decides whether the plan is possible at all.
Where to start
Bring your current income and debts, details of any property you already own including what you think it is worth, and either the rent on the property you are looking at or the likely rent on the home you would be keeping. One of the My Mortgage team will run it across the banks, and because the shading and the policies differ, that is genuinely worth doing rather than taking the first answer.
Ready to run the numbers on an investment property or keeping your current home as a rental?
Get in touch with Greg today or book a call directly in his calendar below for a clear, tailored assessment.
