What Not to Do When Buying an Investment House

The most costly investment loan mistakes are made before the contract is signed. For Fairfield residents weighing up a first rental purchase, the decisions that matter most are how much you can borrow, how the loan is structured, and when you buy.

This article covers the pitfalls we would want a Fairfield buyer to understand before making an offer on an investment house.

How Much Can You Borrow for an Investment Property?

Your investment loan amount is set by a lender's serviceability assessment, not by the price of the property you like. Banks must test your ability to repay at a rate at least 3.0 percentage points above the loan's actual rate, as confirmed by APRA's May 2026 update.

Rental income helps, but only part of it counts. APRA's guidance is that prudent lenders count no more than 80 per cent of expected rent, to allow for vacant periods. Lenders also place less weight on a rental appraisal for a property you are yet to buy than on rent actually received.

Existing debts reduce your capacity too. Lenders look at credit card limits, not just balances, so a card you rarely use can still lower what you can borrow. Our borrowing capacity page explains how we assess this before you start inspecting properties.

Interest-Only vs Principal and Interest: A Worked Example

An interest-only loan lowers your early repayments but does not reduce your debt, and it does not increase how much you can borrow. Lenders assess an interest-only loan as if you were repaying principal and interest over the remaining term, so the capacity is lower than on an equivalent principal and interest loan.

Consider a Fairfield investor who borrows $600,000 over 30 years. For illustration, we use a rate of 6.75% p.a. on both structures.

• On interest-only for the first five years, the repayment is about $3,375 a month, and the balance stays at $600,000.
• When the loan reverts to principal and interest over the remaining 25 years, the repayment rises to about $4,146 a month, roughly $771 more.
• Had the investor chosen principal and interest over the full 30 years from day one, the repayment would be about $3,892 a month.

The outcome is a lower cash outlay for five years, followed by a noticeably higher repayment on a balance that has not shrunk. The trade-off is that the investor has paid more total interest over the life of the loan than they would have with principal and interest from the start. Interest-only suits an investor who has a clear plan for that period, such as building a cash buffer. It is a poor fit if it is chosen only to stretch a tight budget.

These figures are illustrative and the actual rate depends on your lender and your deposit. You can test your own numbers with our mortgage repayment calculator.

Does Negative Gearing Still Apply to a New Investment Purchase?

It depends on when you buy and what you buy. Under legislation that received royal assent on 26 June 2026, properties held at 7:30pm AEST on 12 May 2026 keep full negative gearing, as do eligible new builds. For established homes bought after that time, the rules change from the 2027-28 income year.

From that income year, net rental losses on established residential properties acquired after that cut-off can only be deducted against other residential property income, including residential capital gains. Excess losses can be carried forward. Properties bought between 12 May 2026 and 30 June 2027 can still be negatively geared under the current rules until 30 June 2027 only.

Interest on money borrowed to buy a rental property is generally deductible, but only the interest part of a repayment counts. The principal part is not deductible. Interest on money you later draw from the loan for private use is also not deductible, because the use of the funds decides the outcome.

The tax result of a purchase should never drive the decision on its own, because losses are still losses. Talk to your accountant about how these rules apply to your income and the type of property you are considering before you commit.

How Do LVR and Lenders Mortgage Insurance Affect an Investment Loan?

Lenders mortgage insurance is generally required when your loan to value ratio (LVR) is above 80 per cent. The 80 per cent mark is not a legal borrowing limit, but a point above which a lender needs insurer approval as well as its own.

The premium is paid by the borrower and is based on the loan amount and LVR, and stamp duty may apply to the premium in some jurisdictions. Each lender sets its own maximum LVR, and lending above 80 per cent needs both the lender's approval and separate approval from the insurer. A larger deposit reduces the LMI cost, but it also ties up cash you may want to keep as a buffer for repairs or vacant periods.

Some buyers use equity in their own home as part of the deposit. This can reduce the cash you need to find, but it increases your total debt and repayments, and the interest on the portion used for your deposit relates to the investment. Our investment loans team can show you how different deposit and equity combinations affect your total borrowing. If you already hold an investment property and the loan no longer suits you, an investment loan refinance may be worth reviewing.

What Fairfield Buyers Should Settle Before Making an Offer

Get your lending approach confirmed first, then choose the property. Fairfield is an inner north-east Melbourne suburb, and the loan structure that suits you will depend on your income, existing debts, deposit and how long you plan to hold the property.

A broker can compare options from banks and lenders across Australia, so you are not limited to a single lender's policy on rental income, LVR or interest-only terms. That comparison is most useful before you sign a contract, when changing course costs nothing.

Call one of our team or book an appointment at a time that works for you. We will walk through your borrowing capacity, loan structure and deposit options so you can approach your investment purchase with a clear plan.

Frequently Asked Questions