Your First Investment Property: How Lenders Assess It and How to Structure the Loan

Rental income doesn't count in full

Lenders don't add the full rent to your income. They typically count only a portion of it, often somewhere around 70 to 80%, to allow for vacancies, management fees and maintenance. A property renting for $600 a week might only add the equivalent of $420 to $480 a week to your assessed income. Lenders also assess the new loan at a buffer above the actual rate, so the rent rarely covers the repayments on paper even when it comes close in real life.

The costs lenders factor in

An investment property comes with costs your home doesn't: landlord insurance, property management, repairs and, in NSW, land tax once your total landholdings pass the threshold, since your own home is generally exempt. Strata levies and council rates still apply as well. Some lenders also treat existing debts more harshly than you'd expect, assessing credit card limits in full and other loans at a buffered rate. All of it comes off your borrowing capacity before the lender decides how much it will lend.

Using equity for the deposit

Most first-time investors fund the deposit by releasing equity from their own home rather than using cash. The cleanest way to do that is a separate loan split secured against your home, used only for the investment deposit and costs. The investment purchase then has its own loan for the rest. Keeping the borrowing for the investment in its own splits means the purpose of each loan is clear, which matters for tax and makes your records much simpler.

Avoid tying the properties together

Some lenders will offer to take both properties as security for one combined loan, often called cross-collateralisation. It can look simpler at the start, but it gives the lender more control when you later want to sell one property, refinance or borrow again. Keeping each property as security for its own loans, even with the same lender, usually leaves you more flexibility down the track.

Interest only or principal and interest

Many investors choose interest-only repayments on the investment loan to keep cash flow lower, while paying down their own home loan as quickly as possible, since that interest isn't tax deductible. Investment rates are often higher than owner-occupier rates, and interest-only rates can be higher again. Interest-only periods are also limited, so plan for what the repayments become when the period ends. The right mix depends on your cash flow, your goals and your tax position.

Whose name it goes in

Before you apply, decide who will own the property: you personally, jointly with a partner or through a company or trust. Each has pros and cons for tax, land tax, asset protection and what happens when you sell, so talk to your accountant about what suits your situation. The choice also changes the lending. Fewer lenders lend to companies and trusts, the paperwork is heavier and directors or trustees are usually asked to guarantee the loan personally. Changing ownership after settlement can trigger stamp duty and capital gains tax, so it's worth deciding before the application rather than after.

Getting the structure right from the start

• Decide with your accountant who will own the property, personally, jointly or through a company or trust, before you apply.
• Keep the investment deposit in its own loan split, separate from your home loan.
• Set up the investment purchase as its own loan, not combined with your home loan.
• Ask whether the lender will take each property as separate security.
• Use an offset account on your home loan for savings, rather than redrawing from investment loans.
• Budget for land tax, insurance, management and repairs before you set a purchase price.
• Get tax advice on the structure before you sign, not after.

Questions, answered

Talk it through

General information only, so the next step is applying it to your numbers. Book a chat, email ugur@demir.loans or call 0495 000 228. Free, no obligation.