Property investment challenges in Vermont usually come down to three pressures: borrowing capacity, cash flow and tax settings. Each one can be managed when it is planned for before you sign a contract.
How Do Lenders Assess Borrowing Capacity on an Investment Loan?
Lenders test whether you can afford repayments at a rate well above the actual loan rate. APRA requires banks and other authorised deposit-taking institutions to assess new borrowers at a rate at least 3.0 percentage points above the loan product rate, and that buffer has been confirmed at that level since October 2021.
Rental income helps, but only part of it counts. APRA's guidance points to a minimum 20 per cent haircut on expected rent, so no more than 80 per cent is included. Lenders also place less weight on a rental appraisal than on actual rent received. Existing debts, including credit card limits, are factored in too.
Banks also work within a limit on high debt-to-income lending, which applies to each bank's overall new lending rather than to you individually. Non-bank lenders are not subject to that limit or the serviceability buffer, though each sets its own credit policy. Our borrowing capacity page explains how your income and commitments shape the result, and our investment loans team can compare lender policies on your behalf.
Interest-Only vs Principal and Interest: What Are the Cash Flow Trade-Offs?
An interest-only investment loan lowers your repayments during the interest-only period, but it does not reduce the debt and does not increase how much you can borrow. Lenders assess interest-only loans on the principal and interest repayments over the remaining term, which can lower your maximum loan size.
As an illustrative example at 6.75% p.a., consider an investor in Vermont with a $600,000 loan over 30 years who wants to ease cash flow in the first five years.
- Interest-only for five years: about $3,375 per month.
- Principal and interest over the full 30 years: about $3,892 per month.
- After the interest-only period, principal and interest over the remaining 25 years: about $4,146 per month.
The investor chooses interest-only and saves roughly $517 per month compared with full principal and interest. The outcome is a lighter cash flow load early on, but a repayment that rises by about $771 per month once the period ends, with the full $600,000 still owing. The trade-off is a higher later repayment and no reduction in debt in the meantime. You can test your own numbers with our mortgage repayment calculator.
What Do the Negative Gearing Changes Mean for New Investors?
For established residential properties acquired after 7:30pm AEST on 12 May 2026, net rental losses will only be deductible against other residential property income from the 2027-28 income year. Properties held at that time continue under the current rules until sold, and eligible new builds can still use losses against all income.
Properties acquired between 12 May 2026 and 30 June 2027 may be negatively geared under the current rules until 30 June 2027 only. Excess losses can be carried forward to offset residential property income in later years. This means a property that relies on a tax refund to stay affordable needs a second look. Your cash flow plan should hold up even if the loss cannot be used against your salary.
Only the interest portion of a repayment is deductible, not the principal. Speak with your accountant about how these rules apply to your situation, as outcomes depend on your circumstances.
How Do LVR and LMI Affect Your Deposit?
Lenders Mortgage Insurance (LMI) is generally required when your loan to value ratio (LVR) goes above 80 per cent. The 80 per cent point is not a legal borrowing limit. It is the level above which lenders generally require LMI, and each lender sets its own caps.
The premium is paid by the borrower and is based on the loan amount and LVR. Borrowing above 80 per cent needs approval from both the lender and the insurer. The main cost is the extra upfront expense and a larger debt, which increases your repayments and your exposure if values fall.
One detail worth knowing is that an offset account balance does not reduce the loan amount when LVR is calculated. Holding cash in offset lowers the interest charged, but it will not move you under the 80 per cent line.
Does Interest on an Equity Release Count as Deductible?
Interest on an equity release is deductible only to the extent the borrowed funds are used to produce income. The ATO looks at how each amount is used at the time it is drawn, not at the original purpose of the loan or the property used as security.
Using equity as a deposit for another rental property can produce deductible interest on that portion. Using part of it for a holiday or a car does not. Where a redraw or sub-account mixes both uses, only the income-producing portion is deductible. Keeping the purposes in separate loan splits makes the records far clearer at tax time. The trade-off is a more complex loan structure with more accounts to manage, and your accountant should confirm the treatment for your circumstances.
If an existing loan is limiting your next purchase, an investment loan refinance may be worth reviewing, weighing any discharge fees and costs against the benefit.
Our Vermont mortgage broker team can map out your borrowing, structure and cash flow before you commit. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
Does an interest-only loan increase how much I can borrow?
No. Lenders assess interest-only loans on principal and interest repayments over the remaining term, which can lower your maximum loan size. The benefit is lower repayments during the interest-only period, not extra borrowing capacity.
How much rental income do lenders count?
APRA's guidance points to a minimum 20 per cent haircut on expected rent, so no more than 80 per cent is counted. Individual lenders set their own policies on the evidence they accept.
When is LMI generally required on an investment loan?
LMI is generally required when your LVR goes above 80 per cent. This is lender policy rather than a legal limit, and both the lender and the insurer must approve the loan.
Is interest on equity released from my investment property deductible?
It is deductible only to the extent the funds are used to produce income. Funds used for private purposes are not deductible, so confirm your situation with your accountant.
