Property Values vs Interest Rates: What You Need to Know

Interest rates and property values move in opposite directions most of the time, but that doesn't mean you should sit on the sidelines waiting for the perfect moment.

When rates drop, more buyers enter the market and prices tend to climb. When rates rise, demand cools and price growth slows or reverses. For landscapers looking at investment loans for tradies, the interaction between these two forces determines how much you can borrow, what your repayments look like, and whether the numbers stack up.

The decision isn't about picking the bottom of the rate cycle or the top of the property cycle. It's about running the numbers on a specific property right now and knowing whether you can service the loan if rates move against you.

How Rate Rises Reduce Borrowing Capacity

Lenders assess your ability to service an investment loan at a rate that's 3 percentage points above the actual loan rate. If a variable rate sits at 6.2 per cent, the bank tests your income against a rate of 9.2 per cent. That buffer has been in place since October 2021 and applies to every new application.

Consider a landscaper earning $95,000 a year through a mix of wages and business income. At a variable rate of 6.2 per cent, the lender calculates repayments at 9.2 per cent. On a loan amount of $450,000, that means proving you can manage roughly $3,600 per month in repayments, even though the actual repayment at 6.2 per cent is closer to $2,750. The difference between what you pay and what the bank tests creates a buffer, but it also restricts how much you can borrow in the first place.

When the actual loan rate climbs from 6.2 per cent to 6.8 per cent, the serviceability test rate moves to 9.8 per cent. The same income now supports a smaller loan. That half-percentage-point rate increase can cut your borrowing capacity by $30,000 to $40,000, depending on your other commitments.

Rental income from the investment property helps offset the loan cost, but lenders typically only count 80 per cent of the expected rent when calculating serviceability. A property generating $550 per week in rent adds around $23,000 to your annual income for serviceability purposes, not the full $28,600.

Property Price Movements and Deposit Requirements

Property values don't just affect how much you need to borrow. They dictate how much cash you need upfront and whether you'll pay Lenders Mortgage Insurance.

An investment property purchased at $600,000 with a 10 per cent deposit requires $60,000 in cash plus another $25,000 to $30,000 for stamp duty and settlement costs. If the same property was valued at $650,000 six months earlier, the 10 per cent deposit alone would have been $65,000. Falling prices reduce the deposit barrier, but they also mean you're buying into a market where other buyers have pulled back.

Lenders Mortgage Insurance applies to most investment loans above 80 per cent loan-to-value ratio. On a $600,000 property with a 10 per cent deposit, LMI can add $15,000 to $20,000 to your upfront costs, and that figure scales with the property price. Some lenders allow you to capitalise the LMI premium into the loan, which means you're borrowing more and paying interest on the insurance cost for the life of the loan.

If property values have dropped but interest rates have risen, you face a trade-off. The lower purchase price reduces your deposit and LMI, but the higher rate reduces how much the bank will lend you. For a landscaper with stable income and existing commitments like a ute loan or business equipment finance, the serviceability test becomes the binding constraint, not the deposit.

Refinancing When Rates Drop After You Buy

Buying at a higher rate doesn't lock you in forever. If rates fall after settlement, refinancing lets you reduce your repayments or access equity if the property has increased in value.

A landscaper who purchased an investment property 18 months ago at a rate of 6.8 per cent on a $500,000 loan is paying roughly $3,350 per month on a principal-and-interest loan. If variable rates have since dropped to 6.0 per cent, refinancing the investment loan brings repayments down to around $3,000 per month. That's $350 per month back in your pocket or available to offset against other debt.

Refinancing also gives you access to equity if the property has grown in value. A property purchased for $600,000 that's now worth $650,000 creates $50,000 in equity. With an 80 per cent LVR, you could access up to $520,000 in total borrowing, compared to the original $480,000. That equity can fund a second deposit, business equipment, or reduce higher-interest debt, depending on your goals and how the new borrowing is structured.

Refinancing isn't automatic. Lenders reassess your income, commitments and the property value. If your circumstances have changed or rental income has dropped due to vacancy, the new lender may not approve the same loan amount. Switching lenders also means paying discharge fees to your existing lender, application fees to the new lender, and potentially valuation and legal costs. Budget $1,500 to $2,500 for the process unless the new lender offers a refinance package that covers some of those costs.

Debt-to-Income Limits and High-LVR Investment Lending

From 1 February this year, lenders can only write 20 per cent of new investment loans to borrowers with total debt that's six times their gross income or higher. The limit applies separately to investment lending and owner-occupier lending.

For a landscaper earning $95,000 per year, six times income is $570,000. If you already have a $400,000 home loan and you're applying for a $200,000 investment loan, your total debt would be $600,000, which puts you over the six-times threshold. The lender can still approve the loan, but it counts toward their 20 per cent quarterly quota. Some lenders hit that quota early in the quarter and stop writing high-DTI loans until the next period. Others price high-DTI lending at a higher rate to manage their exposure.

The DTI limit doesn't apply to non-bank lenders, but those lenders typically price their loans higher than the major banks. If your debt-to-income ratio is above six and the banks have exhausted their quota, a non-bank lender might be the only option, and the rate difference can be 0.5 to 1.0 percentage points higher.

For investment loans above 80 per cent LVR, the DTI limit compounds the issue. You're paying LMI, the interest rate is typically higher than a low-LVR loan, and you're more likely to breach the six-times DTI threshold because the loan amount is larger relative to the property value. In our experience, landscapers using finance for tradies who plan to hold investment property long-term benefit from getting the deposit above 20 per cent, even if it means waiting another six months to build the cash buffer.

Tax Changes and How They Affect Investment Loan Demand

From the 2027-28 income year, losses on established investment properties purchased after 12 May last year can only be offset against income from other residential properties, not against your landscaping income. The change doesn't apply to properties you already own or new builds.

If you buy an established investment property now and the loan interest plus holding costs exceed the rental income by $8,000 per year, that $8,000 loss can only reduce tax on other property income or be carried forward to offset a future capital gain on a residential property. It won't reduce the tax you pay on your wages or business income.

For a landscaper on a marginal tax rate of 32.5 per cent, an $8,000 loss previously delivered a $2,600 tax refund each year. Under the new rules, that refund disappears unless you own multiple properties or sell the property at a gain. The loss isn't gone - it's quarantined until you have residential property income to offset it against.

The reduction in after-tax benefit makes positively geared properties or properties with small losses more attractive than heavily negatively geared investments. A property generating $450 per week in rent with loan repayments and costs that roughly match that income won't deliver a tax refund, but it also won't cost you money each month. If the property grows in value over time, the deferred losses reduce your capital gains tax when you sell.

Properties classified as new builds retain full negative gearing. A new build is defined as a dwelling constructed on previously vacant land or a development that increases the total number of dwellings on the site. A knock-down rebuild that replaces one house with one house doesn't qualify. A duplex that replaces a single dwelling does. For landscapers looking at home loans for landscapers or investment loans, the new build exemption creates a price premium. Developers know investors will pay more for a property that keeps the old tax treatment, and that premium can be $30,000 to $50,000 depending on the location.

Should You Wait for Rates to Fall Further?

Waiting for lower rates means competing with more buyers when those cuts arrive. Waiting for lower prices means accepting higher rates in the meantime.

A property purchased at $580,000 with a 6.5 per cent interest rate costs roughly $3,050 per month on a $520,000 loan with a 10 per cent deposit and capitalised LMI. If you wait six months and the property price drops to $560,000 but the rate has risen to 7.0 per cent, your repayments on a $505,000 loan are roughly $3,100 per month. You've saved $15,000 on the purchase price and LMI, but your monthly cost is higher and your borrowing capacity is lower.

If you wait and rates drop to 5.8 per cent but the property price rises to $610,000, your repayments on a $550,000 loan are around $3,000 per month. Your monthly cost is lower, but you need a $61,000 deposit plus $30,000 in stamp duty and costs. The timing question comes down to whether you have the deposit now, whether the property generates enough rent to cover most of the loan cost, and whether you can service the loan at a rate 3 percentage points higher than the current variable rate.

Lenders don't care whether you bought at the top or bottom of the cycle. They care whether your income supports the loan at the stressed rate, whether the property is mortgageable security, and whether you can demonstrate a history of managing credit.

Call one of our team or book an appointment at a time that works for you. We'll run the serviceability numbers on your current income, show you what loan amount the banks will support at today's rates, and identify which lenders have capacity under the DTI limits.

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