Understanding the basics of investment property loans

Buying a rental property in Doncaster means understanding how lenders assess investment applications differently from owner-occupied purchases.

The approval depends on rental income, your existing commitments, and whether the numbers still work when the property sits vacant. Lenders assess your capacity to service the loan at a rate three percentage points above the product rate, and they'll shade the rental income by around 20 per cent to account for vacancy and maintenance periods. If you're already carrying debt or your income fluctuates, that shaded income can make the difference between approval and decline.

How lenders assess rental income for borrowing capacity

Lenders typically use 80 per cent of the expected rental income when calculating borrowing capacity for an investment purchase. A property in Doncaster that rents for $600 per week becomes $480 per week in the serviceability calculation. That $120 reduction accounts for periods when the property sits empty, maintenance weeks, and agent commissions.

Consider a buyer who earns $95,000 per year and has $1,200 in monthly credit commitments. Without rental income, their borrowing capacity sits at around $520,000. Add the shaded rental income from a Doncaster property, and that capacity might increase to $650,000. The actual figure depends on the lender's assessment rate, which currently sits three percentage points above the loan's interest rate. That buffer hasn't changed since late 2021, and it's been maintained through multiple policy reviews.

If the same buyer already owns an investment property with a $450,000 loan balance, the new application gets harder. The existing loan's full repayment at the buffered rate counts against their income, even if the loan is currently interest-only. The rental income from that first property is also shaded to 80 per cent. Lenders call this cross-collateralisation risk, and it's one reason portfolio investors often structure loans carefully from the start.

Structuring your deposit and understanding LVR limits

Most lenders cap investment loans at 90 per cent LVR, though some will lend up to 95 per cent in limited cases. Above 80 per cent, you'll pay Lenders Mortgage Insurance, which is calculated on the loan amount and LVR. At 90 per cent LVR on a $700,000 property, the LMI premium typically sits between $18,000 and $25,000 depending on the insurer and your borrowing profile. That premium can be added to the loan or paid upfront.

If you're using equity release from your current home to fund the deposit, the lender will assess both properties together. Your owner-occupied property might be valued at $900,000 with a $400,000 loan balance, leaving $500,000 in equity. At 80 per cent LVR, you can access $320,000 of that equity without triggering LMI on the existing loan. That's enough to cover a 10 per cent deposit on a $700,000 property in Doncaster plus settlement costs.

Genuine savings aren't always required for investment purchases if you're using existing equity, but lenders will still want to see that you can manage cash flow. If your savings history is thin and you're stretching serviceability, some lenders will decline the application even when the LVR is acceptable.

Interest-only repayments and their effect on cash flow

Interest-only repayments keep your monthly commitment lower during the loan's initial period, which can help when rental income doesn't quite cover all holding costs. On a $630,000 loan at a rate of 6.5 per cent, interest-only repayments sit at around $3,413 per month. The same loan on principal and interest would be approximately $3,985 per month, a difference of $572.

That difference matters when you're holding multiple properties or when you're planning to use surplus cash flow for renovations or further investment. But interest-only periods are typically limited to five years on a residential loan, and the loan must revert to principal and interest after that period unless you apply to extend. Lenders are less willing to extend interest-only terms on investment loans than they were a few years ago, particularly where the LVR remains above 80 per cent.

Under current prudential rules, a residential loan with an interest-only period longer than five years and an LVR above 80 per cent is classified as non-standard, which means higher capital requirements for the lender and often a declined application for the borrower. Loans structured with sequential interest-only periods that together exceed five years face the same treatment if the total exposure crosses that threshold.

Fixed or variable rates for investment purchases

Variable rates on investment loans currently sit above owner-occupied rates by around 0.3 to 0.6 percentage points depending on the lender. Fixed rates are similarly priced at a premium to owner-occupied fixed products. The gap reflects the higher capital cost that lenders carry on investor exposures under the prudential framework.

You can split the loan between fixed and variable portions if you want rate certainty on part of the debt while keeping offset access on the rest. Offset accounts only work on variable portions, so if you fix the entire loan, any surplus cash in your offset won't reduce interest. For investors who plan to build cash reserves or who receive irregular rental income, keeping at least part of the loan variable makes sense.

Fixed rates lock you in for the agreed term, and breaking the fixed portion early can trigger break costs if rates have fallen since you fixed. Those costs are calculated on the difference between your fixed rate and the lender's current wholesale funding cost for the remaining fixed period. We've seen break costs range from a few hundred dollars to tens of thousands depending on the rate movement and the time left on the fixed term.

Tax treatment and deductibility from 1 July 2027

For properties purchased before 7:30pm AEST on 12 May 2026, the existing negative gearing rules still apply. Interest, rates, insurance, property management fees, and other holding costs remain deductible against your total taxable income, including salary. If your rental expenses exceed your rental income, the loss reduces your tax.

Properties purchased on or after that date face quarantined treatment from 1 July 2027. Rental losses can only offset other rental income or be carried forward to offset future rental income or capital gains from residential property. You can't claim the loss against your salary. If you're buying an eligible new build that increases the dwelling count on the land, the old rules continue to apply and you keep full deductibility.

For buyers in Doncaster, this means established houses and older units are now subject to quarantining, while newly built townhouses or dual-occupancy developments that increase dwelling numbers remain eligible for full deductions. The ATO has confirmed that knock-down rebuilds which don't increase dwelling numbers are treated as established properties under the new rules.

How the new capital gains tax rules apply from 1 July 2027

From 1 July 2027, the 50 per cent CGT discount is replaced with cost base indexation and a minimum 30 per cent tax rate on real gains for most residential investment properties. If you buy a property now and sell it after 1 July 2027, the gain is split. The portion of the gain that accrued before 1 July 2027 is taxed under the old rules with the 50 per cent discount. The portion that accrued after that date is taxed using indexation and the 30 per cent minimum rate.

You can either obtain a market valuation as at 1 July 2027 to establish the split, or use the ATO's apportionment formula once it's published. Eligible new builds retain the option to use either the 50 per cent discount or the indexed cost base with the minimum rate, whichever produces the lower tax.

If you're receiving a means-tested payment such as the Age Pension or JobSeeker in the year you sell, the 30 per cent minimum rate doesn't apply to you for that financial year. The indexed cost base still applies, but your marginal rate determines the tax rather than the 30 per cent floor.

Debt-to-income caps and how they affect portfolio investors

From 1 February 2026, each lender can only approve 20 per cent of new investor loans at a debt-to-income ratio of six times or greater. If your total investment borrowing is six times your gross income or more, you're inside that cap. Lenders manage their allocation carefully, and some have tightened their own internal limits below the regulatory cap.

For buyers with strong income and limited existing debt, the cap rarely bites. For buyers adding a second or third investment property, it can mean a declined application even when serviceability at the buffered rate is met. The cap applies to new lending only, so your existing loans aren't affected, but each new application is assessed against your current income and total investment debt.

Loans for newly constructed dwellings, newly erected dwellings, and bridging finance for owner-occupiers are excluded from the cap. If you're buying a newly built townhouse in Doncaster that's never been occupied, the loan sits outside the DTI limit. If you're buying an established house, the loan is subject to the cap.

What settlement costs to budget beyond the deposit

Stamp duty in Victoria is calculated on the purchase price and is higher for investment properties than for owner-occupied purchases. A $700,000 investment property in Doncaster attracts stamp duty of around $38,600. You'll also pay legal fees, building and pest inspection costs, and lender application fees. In total, budget another $15,000 to $20,000 on top of your deposit and any LMI premium.

If you're buying in a townhouse or apartment complex, budget for the first quarter's body corporate fees at settlement. Some lenders will add settlement costs to the loan if the final LVR remains within policy, but most prefer to see genuine cash for costs even when the deposit is funded by equity.

Choosing loan features that suit property investors

Offset accounts, redraw facilities, and portability can all add value depending on your strategy. An offset account linked to the variable portion of your loan reduces interest daily based on the balance in the account, and the interest saving is not treated as income for tax purposes. Redraw allows you to access extra repayments you've made, but those extra repayments reduce your interest deduction, so the tax outcome is different.

Portability lets you transfer the loan to a new property without breaking the existing rate or terms. If you plan to sell your current investment and purchase another within a short window, portability avoids discharge and establishment fees. Not all lenders offer portability on investment property finance, and those that do often limit it to like-for-like security.

Why Doncaster appeals to investors

Doncaster sits around 15 kilometres east of Melbourne's CBD and offers a mix of established family homes, newer townhouses, and medium-density developments. The area is serviced by Westfield Doncaster, several private and public schools, and the Eastern Freeway. Rental demand comes from families, professionals, and some downsizers looking for proximity to the city without inner-suburb density.

Vacancy rates in the Manningham local government area, which includes Doncaster, have historically sat below the Melbourne metro average. That doesn't mean every property rents immediately, but it does mean tenant demand is relatively stable. Properties near the Westfield precinct and within the catchment zones for sought-after schools tend to rent faster and at higher weekly rates than those on the area's outer edges.

The suburb has seen consistent capital growth over the past decade, though like most of Melbourne, values softened during the recent rate cycle. Investors who purchased in Doncaster in the early part of the last decade and held through the cycle have generally seen solid long-term returns, supported by both rental yield and capital appreciation.

When refinancing an investment loan makes sense

If your current investment loan is on a rate that's no longer competitive, refinancing can reduce your monthly repayment and improve cash flow. Some investors refinance to release equity for further purchases, while others refinance to move from interest-only back to interest-only after the initial period expires.

Refinancing an investment loan involves the same serviceability assessment as a new application. The lender will shade your rental income, apply the three percentage point buffer, and factor in all your existing commitments. If your circumstances have changed since the original loan was approved, the new lender may offer a lower amount or decline the application altogether.

Break costs apply if you're exiting a fixed rate early, and discharge fees apply when you leave your current lender. Weigh those costs against the interest saving over the remaining loan term before proceeding. In many cases, the saving justifies the cost, but not always.

Call one of our team or book an appointment at a time that works for you. We'll review your current position, explain which loan structures suit your goals, and walk you through the numbers so you're clear on cash flow and borrowing capacity before you start looking at properties.

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