Investment loan applications get knocked back more often than owner-occupier applications, and the reason usually comes down to how the numbers are presented.
Lenders assess investment loans differently because the property does not generate income the same way your wages do. They factor in vacancy periods, apply a discount to rental income, and test your ability to service both your home loan and the investment loan at a rate roughly three percentage points higher than what you will actually pay. If you are self-employed, they will also want to see two years of financials that show consistent profit, not just turnover. The application either stacks up under those conditions or it does not.
Rental income gets discounted before it counts toward serviceability
Lenders do not accept the advertised rent as income. They shave off 20 to 30 per cent to account for periods when the property sits empty, maintenance costs, and the chance that a tenant stops paying. If a property rents for $600 a week, the lender might only count $420 to $480 of that toward your ability to service the loan.
Consider a sparky who owns his home and wants to buy a unit as an investment. The unit rents for $550 a week. The lender applies a 25 per cent discount, so they count $412.50 a week, or roughly $1,787 a month. If the loan repayment at the assessment rate is $2,400 a month, the shortfall is $613. That shortfall has to be covered by his wage, and the lender will test whether he can afford his existing home loan, the investment loan shortfall, and his living expenses all at once. If the sums do not work, the application fails, regardless of how much deposit he has saved.
This is why investment loans for tradies require a closer look at your current income and commitments before you start shopping for a property.
Lenders test your income at a rate you will not actually pay
Every lender is required to assess your loan serviceability at a rate that is at least three percentage points above the actual loan rate. This is called the serviceability buffer. If the variable rate on the loan is 6.5 per cent, the lender tests whether you can afford repayments at 9.5 per cent.
For an investment loan, this buffer applies to both the new loan and any existing debt. If you have a ute loan, a home loan, and you are applying for an investment loan, all three are tested at the higher rate. The buffer does not change your actual repayment, but it does change how much the lender will let you borrow.
From February this year, lenders have also been required to limit the number of new investment loans they write to borrowers with a debt-to-income ratio of six times or more. If your total debt across all loans is already sitting at six times your gross annual income, some lenders will not be able to approve any additional borrowing, even if you can service it. Others still can, but they are fewer in number, and their rates may not be as sharp.
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You need a deposit, but it does not always have to be cash
Most lenders want at least a 20 per cent deposit on an investment property to avoid LMI. Some will lend at higher loan-to-value ratios, but the insurance premium gets added to your costs, and it is not deductible.
If you have equity in your home, you can use that instead of cash. The lender treats the equity as security and allows you to borrow against it to fund the deposit on the investment property. You do not need to sell anything or pull cash out of an offset account. The loan structure changes - you end up with a loan split secured against your home and a separate loan secured against the investment property - but it means you can move faster and keep your savings where they are.
Equity release works well when your home has increased in value and you have paid down enough of the loan to create a buffer. If your home is worth more than what you owe, and the combined loan-to-value ratio across both properties does not push you over 80 per cent, you can usually access that equity without paying LMI. Equity release loans for tradies set out how the structure works in detail.
Interest-only loans reduce your repayments but increase what you pay over time
Most investment loans are written on an interest-only basis for the first one to five years. You pay only the interest portion of the loan, not the principal, which keeps the monthly repayment lower and may improve your cash flow if the rent does not cover the full cost.
Interest-only loans also preserve your ability to claim the maximum deduction for interest, because the loan balance does not reduce. Once the interest-only period ends, the loan reverts to principal and interest, and the repayment jumps. If you have not planned for that increase, it can put pressure on your budget, especially if you have multiple investment properties all rolling off interest-only terms around the same time.
Some lenders allow interest-only periods longer than five years, but if the loan-to-value ratio is above 80 per cent and the interest-only term is not clearly defined or exceeds five years, the loan may be classified differently under the prudential standards, which affects how the lender prices it. Interest-only loans for tradies covers the repayment structures and what happens when the term ends.
Tax treatment depends on when you bought and what you do with the loss
If you bought an investment property before May last year, or you are buying a new build, rental losses can still be offset against your wage. That means if your investment property costs you $8,000 a year more than it earns in rent, you can reduce your taxable income by that amount and pay less tax overall. This is what people refer to when they talk about negative gearing.
If you buy an established property now, rental losses can only be offset against income from other residential property, including capital gains when you sell. You can still claim the loss, but it does not reduce the tax you pay on your wage until you dispose of the property. Losses carry forward, so they are not wasted, but the cash flow benefit disappears.
For tradies running their own business, this matters more than it does for wage earners, because your taxable income can fluctuate year to year depending on how much you draw from the business. If your income is lower in a given year, the value of a deduction drops as well. The structure you choose for the loan and the type of property you buy should match how your income is reported and what you are trying to achieve with the investment. Finance for tradies explains how self-employed income is assessed and what lenders need to see before they approve any loan, including investment loans.
Lenders want to see consistent income if you are self-employed
If you are running your own business, lenders typically ask for two years of tax returns and two years of financials prepared by your accountant. They look at your net profit after expenses, not your turnover, and they average the profit across the two years. If your profit dropped in the most recent year, some lenders will only use the lower figure. Others will average, but apply a loading or ask for a larger deposit.
In our experience, the biggest issue is not the amount of profit, but how it is reported. If you are claiming significant deductions for depreciation, home office, motor vehicle, or other non-cash expenses, your taxable income can look lower than your actual cash flow. Some lenders will add back certain deductions to get a clearer picture of serviceability. Others will not. Knowing which lenders will work with your specific tax structure makes the difference between an approval and a decline.
Documents you will need before you lodge the application
You will need recent payslips if you are on wages, or tax returns and financials if you are self-employed. The lender will also want to see your most recent rates notice for any property you already own, a rental appraisal or lease agreement for the property you are buying, proof of your deposit, and statements for any offset or savings accounts you hold. If you are using equity, the lender will order a valuation on your existing property.
If you have a company or family trust, the lender may ask for trust deeds, company extracts, and director identification. Some lenders accept applications from companies or trusts for investment purposes. Others do not, or they price the loan higher because the security is held in a different name. Sorting this out before you make an offer avoids delays later.
Application timing affects whether you can settle on time
Most investment loan applications take two to four weeks to assess, depending on how quickly you provide documents and whether the lender orders a valuation. If the property is in a regional area or the lender has concerns about the type of property - units in oversupplied areas, properties with short lease terms, or dwellings on large rural blocks - the assessment can stretch out further.
If you have exchanged contracts with a 30-day settlement, you need to lodge the application within the first week to leave enough time for the lender to assess, the valuer to inspect, and the bank to issue formal approval and send the documents to your solicitor. Missing settlement because the loan was not approved in time can cost you the deposit.
Home loans for tradies are generally faster to assess than investment loans because the lender does not need to factor in rental income, vacancy rates, or investment-specific risk weights. If timing is tight, get pre-approval sorted before you start looking at properties, not after you have signed a contract.
Not all lenders assess investment loans the same way, and the difference in policy can mean the difference between borrowing what you need and falling short. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
How much deposit do I need for an investment loan?
Most lenders require at least 20 per cent to avoid LMI. You can use cash savings or equity from your existing home as the deposit, provided the combined loan-to-value ratio across both properties does not exceed 80 per cent.
Do lenders count the full rent as income when assessing an investment loan?
No. Lenders apply a discount of 20 to 30 per cent to the advertised rent to account for vacancies and maintenance. The discounted figure is what counts toward your ability to service the loan.
Can I still negatively gear an investment property I buy now?
Yes, but only if you are buying a new build or you bought the property before May last year. For established properties purchased after that date, rental losses can only be offset against other residential property income, not your wage.
What is the serviceability buffer and how does it affect my borrowing capacity?
The serviceability buffer is an additional three percentage points that lenders add to the loan rate when testing whether you can afford the repayments. It does not change your actual repayment, but it does reduce how much you can borrow.
Can I use equity from my home instead of cash for the deposit?
Yes. If you have enough equity in your existing home, the lender can use it as security for the deposit on the investment property. This allows you to buy without needing to save a separate cash deposit, provided the combined loan-to-value ratio stays within the lender's limits.
