Cash flow calculator
What the property actually costs you each week after every outgoing.
Investment Property Loans
Lenders assess an investment loan differently to the one on your own home. The rules on rental income, deposits and structure are where most investors lose money without realising it.
An investment loan funds a property you rent out rather than live in. Lenders typically want a larger deposit than for an owner-occupied purchase, count only part of the rent as income, and price the loan differently. Structure decisions made at application are difficult and expensive to unwind later.
How much deposit you actually need
Most lenders will consider an investment purchase from a 10% deposit, and some from less, but below 20% you will pay Lenders Mortgage Insurance. On an investment property LMI is often a larger sum than people expect, because it scales with both the loan size and the loan-to-value ratio. Our LMI calculator gives you an indicative figure.
You do not necessarily need that deposit in cash. If you already own property, the equity in it can serve as the deposit, and this is how most second and third purchases are funded. The usable equity calculator shows roughly how much may be available to you. Whether that is the right move depends on how the two loans are secured against each other, which is covered below.
Why lenders discount your rent
Lenders do not treat rental income as equivalent to salary. Most count somewhere in the region of 70 to 80% of the gross rent when assessing your capacity, on the reasoning that the rest is absorbed by vacancy, management fees, rates, insurance and maintenance.
This is why an investor is often surprised to find that a property paying its own way in cash terms still reduces their borrowing capacity. Lenders also apply an assessment buffer above the actual rate, so the loan is tested at a higher repayment than you will really pay. Our borrowing power calculator applies a similar buffer so the number you see is closer to what a lender would reach.
The practical consequence: each additional property is harder to finance than the last, and the lender you choose for the first one affects how many more you can buy. Lenders vary widely in how generously they treat rent, existing debt and negative gearing. Choosing the most generous lender first, when you do not need them, can leave you with nowhere to go later.
Cross-collateralisation, and why to avoid it
When you use equity in your home as the deposit for an investment property, a lender will often propose securing both properties against both loans. This is convenient for them and rarely good for you.
Once the properties are tied together, selling one requires the lender's consent and often a revaluation of the other. Releasing equity becomes harder. Moving one loan to a different lender means unwinding the whole arrangement. Investors frequently discover this years later, at the exact moment they want to sell or restructure.
The alternative is a standalone split. Release the equity from your existing property as its own separate loan, then use those funds as the deposit for a loan secured only against the new property. The two stay independent. This takes slightly more work to set up and saves a great deal of difficulty later.
This is the sort of decision where an independent broker earns their place. A lender's own staff are not incentivised to structure your borrowing so that you can leave them.
Interest only, and when it makes sense
Interest-only repayments are common on investment loans because they keep outgoings low and, for many investors, the interest portion is deductible while principal repayments are not. That can suit a deliberate strategy.
The risk is the reversion. When the interest-only period ends, the loan must repay the full principal over a shorter remaining term, so the repayment steps up sharply, often by a third or more. Investors who have not planned for that date feel it suddenly. The interest-only versus principal and interest calculator shows both the current difference and the size of that step up.
We are mortgage brokers, not accountants or tax advisers. Whether interest-only suits your tax position is a question for your accountant, and we will happily work alongside them.
Running the numbers before you buy
The figure that matters is not the rent, and it is not the rate. It is what the property costs you each week once every outgoing is counted: loan interest, strata, council rates, water, insurance, letting and management fees, and an allowance for vacancy.
Our investment property cash flow calculator works that out weekly and annually. Enter realistic figures rather than optimistic ones, particularly for vacancy and maintenance, because those are the two most commonly understated.
Remember also that stamp duty on an investment purchase carries no first home buyer concession. The NSW stamp duty calculator uses the current Revenue NSW rates, and property purchase costs covers the rest of the upfront money.
What we do
We compare more than 60 lenders and, importantly for investors, we know which of them treat rental income, existing debt and multiple properties most favourably. That difference determines not just whether this purchase is approved, but whether the next one can be.
We will also structure the borrowing so your properties stay separable, keep your options open for the purchase after this one, and tell you plainly when a deal does not work. Our service costs you nothing; we are paid by the lender on settlement, and that is disclosed in our Credit Guide.
Common questions
Commonly 10% or more, with 20% avoiding Lenders Mortgage Insurance. Equity in a property you already own can be used in place of cash. Below 20% expect LMI, and expect it to be a larger figure than on an owner-occupied loan of the same size.
Yes, and it is the most common way people fund a second property. The important part is how it is structured: release the equity as a separate split rather than allowing both properties to be secured against both loans, so you can sell or refinance either one independently later.
No. Most count roughly 70 to 80% of gross rent, to allow for vacancy and holding costs. The exact treatment varies noticeably between lenders, which is one of the main reasons the choice of lender matters more for investors than for owner-occupiers.
Generally lenders price investment lending differently to owner-occupied lending, and interest-only differently again. The gap varies by lender and changes over time, which is precisely why comparing across a panel is worth more on an investment loan than on almost any other product.
There is no fixed cap. Each purchase is limited by serviceability, and each existing loan reduces the capacity available for the next. Sequencing lenders sensibly, and keeping properties uncrossed, is what determines how far a portfolio can go.
Structure it properly the first time
The lender you choose for this purchase decides how easily you can make the next one.
Related
Buying a second property
Upsizing or holding two properties rather than building a portfolio.
SMSF property loans
Buying an investment property inside a self-managed super fund.