Do you know what lenders check for investment loans?

What lenders assess when you apply for an investment loan

Lenders assess your ability to service the loan at a rate at least 3.0 percentage points above the actual product rate, your existing debt commitments, and the rental income the property is expected to generate. They also apply a debt-to-income limit that restricts the proportion of high-DTI lending in their portfolio.

The serviceability buffer means that even if you're quoted a variable rate around 6.2 per cent, the lender models your repayments at 9.2 per cent or higher. Rental income is included in the assessment, but most lenders shade it by 20 per cent to account for vacancy and holding costs. If the property is expected to generate $450 per week in rent, the lender will typically use $360 per week in the calculation.

Consider a buyer in Warragul looking to purchase a unit as their first investment property while continuing to rent where they currently live. They earn $95,000 per year, have $8,000 in credit card limits and a car loan with $380 per month remaining. The property they're considering is listed at $420,000 and comparable units in the area rent for around $400 per week. After shading, the lender uses $320 per week, or about $1,387 per month. The buyer applies for a 90 per cent loan, borrowing $378,000. At the buffered rate of 9.2 per cent, repayments on a principal-and-interest loan are roughly $3,050 per month. The lender adds the car loan commitment, applies a liability rate to the credit card limit (typically 3.0 to 3.8 per cent of the limit per month, or around $240 to $300), then deducts all these from the buyer's net income plus the shaded rental income. The buyer's application is approved, but only after they reduce one credit card limit and provide a signed lease indication from a local property manager.

How your deposit size affects borrowing costs and loan structure

A deposit of 20 per cent or more avoids Lenders Mortgage Insurance and often unlocks better pricing. Borrowing above 80 per cent LVR adds an upfront insurance premium that can run to several thousand dollars, and the loan generally attracts a higher risk weight under the lender's capital rules, which flows through to rate and fee structures.

LMI premiums are calculated on a sliding scale. At 90 per cent LVR the premium might sit around 2.5 to 3.5 per cent of the loan amount, depending on the lender and the insurer. On a $400,000 loan that's $10,000 to $14,000, capitalised into the loan or paid upfront. Some lenders will lend up to 95 per cent LVR for investment purchases if you have a strong income position and limited other debt, but the premium rises steeply and borrowing capacity tightens because the larger loan amount increases the serviceability requirement at the buffered rate. In our experience, clients in regional areas including Gippsland often find a 10 per cent deposit workable if they've been saving consistently and have access to the First Home Super Saver Scheme or a small gift from family, but they need to budget for LMI and accept a higher monthly repayment.

Interest-only versus principal-and-interest repayments

Interest-only repayments reduce your monthly outgoing and can improve cash flow in the early years, but they do not reduce the loan balance. Principal-and-interest repayments build equity from day one and generally attract a lower rate.

Most lenders offer interest-only periods of up to five years on investment loans. During that period you pay only the interest component, which on a $400,000 loan at 6.2 per cent is around $2,067 per month. A principal-and-interest repayment on the same loan would be approximately $2,450 per month. The difference is $383 per month, which might be the margin between negative and neutral cash flow once you account for other holding costs such as rates, insurance, and body corporate fees if applicable.

After the interest-only period ends, the loan reverts to principal-and-interest and the remaining term shortens, so the repayment jumps. A $400,000 loan with five years interest-only and then 25 years principal-and-interest will have a repayment around $2,590 per month once it reverts, assuming the rate hasn't changed. If you select interest-only, build the reversion date and the higher repayment into your long-term planning. Some investors use the lower repayment period to save the difference or to pay down non-deductible debt such as an owner-occupied home loan, which can be a sound approach if executed with discipline. Others use it simply to make the investment affordable in the first few years while rent and income growth catch up.

Fixed or variable rate for your first investment property

A variable rate gives you full offset and redraw flexibility and the ability to make extra repayments or refinance without break costs. A fixed rate locks your repayment for a set term but generally does not allow offset, caps extra repayments, and can trigger significant break costs if you exit early.

Most investment loans written in Gippsland over the past two years have been variable or split, because investors value the ability to adapt the loan structure as their circumstances and the portfolio develop. Offset accounts are particularly useful for investors who are also paying down an owner-occupied loan or building a deposit for the next purchase. Any funds in the offset reduce the interest charged on the investment loan without reducing the deductible interest, because the loan balance itself does not change. You can then redeploy those funds when needed without reapplying for credit.

Fixed rates remove repayment uncertainty for the fixed period, which can help with budgeting, but you lose access to the offset facility and flexibility. If you need to sell or refinance during the fixed term due to changed circumstances, the lender will generally charge a break cost based on the difference between your fixed rate and the wholesale rate for the remaining term. In a falling rate environment those costs can run to thousands of dollars. A split structure, where part of the loan is fixed and part variable, is a middle path, but adds administrative overhead because you're managing two loan accounts with different features and rate schedules.

Rental income, vacancy assumptions, and cash flow planning

Lenders assume a vacancy rate when assessing your application, but your actual cash flow depends on how the property performs and how you manage holding costs between tenancies. Most lenders shade rental income by 20 per cent, but in reality vacancy rates in regional Victoria vary by location, property type, and tenant demand.

In Traralgon and Morwell, vacancy rates have historically sat between 2 and 4 per cent in strong years, driven by healthcare, education, and energy sector employment. In smaller towns the rate can be higher and tenancy periods shorter. A 20 per cent shading is conservative for serviceability, but for your own cash flow planning a realistic assumption is one to two weeks vacant per year, plus allow for periodic maintenance and the risk of rent arrears. On a property generating $400 per week, two weeks vacancy costs $800. Add another $1,000 to $2,000 per year for repairs and maintenance, $1,200 to $1,800 for landlord insurance, and $1,500 to $2,500 for council rates and water, and you're holding $4,500 to $7,100 in non-finance costs each year before agent fees.

If you're negatively geared, those costs plus your loan repayment will exceed your rent. The shortfall is funded from your after-tax income and the interest portion is deductible, which reduces your taxable income and generates a refund or reduction in tax payable. From the 2027-28 income year, if you purchase an established property after 12 May 2026, losses can only be offset against other residential property income, not your salary. Properties purchased before that date, and new builds purchased after that date, continue to allow full deductibility. The tax treatment materially changes the cash flow equation and should be factored into your purchase decision and your choice between established and new stock.

How equity in your current property can fund the deposit

If you own an owner-occupied property with sufficient equity, you can borrow against that equity to fund the deposit and costs for the investment purchase without selling or using savings. The structure is commonly called an equity release or top-up, and it allows you to keep your savings intact for other purposes or emergencies.

Consider a scenario where you own a home in Moe valued at $480,000 with a remaining loan balance of $280,000. You have $200,000 in equity. The lender will typically allow you to borrow up to 80 per cent of the property's value without LMI, which is $384,000. You owe $280,000, so you can access up to $104,000. That's enough to cover a 10 per cent deposit on a $400,000 investment property ($40,000), plus stamp duty (around $21,000 in Victoria on a $400,000 purchase), plus LMI on the investment loan ($10,000 to $14,000), plus settlement and other costs. The additional borrowing is secured against your home, and the interest on the additional amount is generally deductible if the funds are used to acquire the investment property. You then take out a separate investment loan for the remaining 90 per cent of the purchase price, secured against the investment property itself.

This approach is widely used but it increases your total debt and your exposure to rate movements. If either property falls in value or your income drops, you have less buffer. The structure also means your owner-occupied property is now supporting two loans, so any future refinance or sale of that property requires the investment loan to be restructured or discharged. Work through the scenarios with your broker and your accountant before committing, particularly if you're planning further purchases in the next few years. TM Finance Group regularly structures these loans for clients across Gippsland and can model the repayment and tax outcomes based on your specific circumstances.

What documentation lenders require for investment loan applications

Lenders require proof of income, typically two recent payslips and either a Notice of Assessment or year-to-date PAYG summary, plus 90 days of statements for all accounts that receive income or service debt. If you're self-employed, the requirements extend to tax returns, financials, and often an accountant's letter. The lender also requires a signed contract of sale or, if you're applying for pre-approval, a rental appraisal or comparable rental evidence for the property type and location you're targeting.

The statements are reviewed for living expenses, pattern of savings, and any uncommitted liabilities such as buy-now-pay-later arrangements or unreported credit. Some lenders use the Household Expenditure Measure, which is a benchmark based on your income, postcode, and household size, and they apply the higher of your declared expenses or the benchmark. Regional postcodes generally have lower benchmarks than metro areas, but the difference is marginal. If your statements show regular gambling, frequent overdrafts, or unpaid defaults, the application will either be declined or require a letter of explanation and evidence of changed behaviour. The lender will also run a credit check, which lists every credit enquiry in the past five years and every open account. Close any accounts you no longer use before applying, particularly credit cards and store cards, because the lender applies a liability to the limit, not the balance.

For investment purchases, the lender will also order a valuation once the contract is signed. If the valuation comes in below the purchase price, the loan amount is calculated on the lower figure, and you'll need to cover the difference from your own funds. In a rising market this is less common, but in areas where stock is thinly traded or the property is unusual in some way, valuation risk is real.

Preparing for your first investment property purchase in Gippsland

Gippsland's regional centres, including Traralgon, Morwell, Warragul, Sale, and Moe, offer a mix of residential property types at price points below metro Melbourne, with rental demand supported by healthcare, education, defence, and energy sector employment. Median unit prices in Traralgon have sat in the $300,000 to $380,000 range over the past 18 months, with houses generally between $450,000 and $550,000, depending on location and condition. Rental yields on units are typically stronger than houses due to the lower purchase price.

Before you start attending inspections, get your borrowing capacity confirmed in writing. A formal pre-approval, valid for 90 days, gives you certainty on loan amount, deposit required, and settlement timeframe. It also signals to selling agents that you're a serious buyer, which matters in a market where stock can move quickly. If you're using equity from another property, allow extra time for that loan to be approved and settled before you exchange contracts on the investment purchase, or structure the finance so both loans settle simultaneously.

Traralgon and Warragul both have established property management networks, which makes tenant placement and ongoing management more reliable than in smaller towns. If you're purchasing in a less active rental market, speak to two or three local agents before you buy and get a written rental appraisal that includes expected time to lease and tenant profile. Properties close to hospitals, schools, and the regional railway line generally lease faster and hold tenants longer. Body corporate properties, particularly older units, can have higher fees and special levies, so request a copy of the body corporate financial statement and minutes before you exchange.

Call one of our team or book an appointment at a time that works for you. We'll review your current position, confirm what you can borrow, and talk through the loan structure and features that suit your circumstances and your plans for the next property after this one.

Frequently Asked Questions