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What makes an investment loan different from your home loan

An investment loan is designed for buying property you'll rent out rather than live in. Lenders assess it differently because rental income replaces your occupancy, and they price it differently because the risk profile changes.

Most lenders will accept between 80 and 100 per cent of the expected rental income when calculating what you can borrow. That percentage varies between lenders and depends on your overall financial position. A property investor buying a two-bedroom apartment in Surry Hills might expect rental income around $800 to $900 per week based on current market conditions in the area, but the lender will discount that figure before adding it to your salary or other income. At the same time, lenders add a buffer of at least 3.0 percentage points above the actual interest rate when testing whether you can afford the repayments. If you're looking at an investment loan at a rate of 6.5 per cent, the lender will assess your ability to service it at 9.5 per cent or higher.

The other difference is how lenders weight the risk. Under current prudential standards, investment loans attract higher risk weights than owner-occupied loans at the same deposit level, which flows through to pricing. You'll generally pay a slightly higher rate on an investor loan than you would on an identical owner-occupied loan, even with the same deposit.

Interest only or principal and interest

Interest only repayments mean you're only paying the interest charged each month, not reducing the loan balance. Principal and interest repayments include both the interest charge and a portion that reduces what you owe.

Interest only is common in the early years of property investment because it keeps your repayments lower and maximises the deduction you can claim against your rental income. If you're borrowing $600,000 at 6.5 per cent, interest only repayments would be around $3,250 per month. The same loan on principal and interest over 30 years would be closer to $3,790 per month. The difference is often reinvested into the property, held as a buffer, or used to pay down non-deductible debt like your home loan.

Interest only periods are typically approved for up to five years on investment loans. After that, the loan converts to principal and interest unless you apply to extend the interest only term, which requires a fresh serviceability assessment and sometimes a valuation. Some lenders will extend for another five years if your circumstances support it. Others cap the total interest only period across the life of the loan.

If you're buying an established property in Surry Hills and the loan settles after mid-May 2026, negative gearing works differently from older properties. You can still claim all your holding costs, including interest, council rates, strata fees, insurance and property management, but any loss you make can only be offset against income from other residential properties or capital gains on residential property. It can't be offset against your salary. Losses can be carried forward to future years and used when you have residential property income or sell the property. Properties you already owned or had under contract by mid-May 2026 continue under the old rules, where losses offset all income including wages. New builds are also exempt and continue to allow full negative gearing regardless of when they're purchased.

This changes the cash flow equation for many buyers. Consider someone earning $120,000 per year who buys an established apartment after the rule change. If the property costs $4,000 per month to hold and generates $3,400 in rent, the monthly shortfall is $600. Under the previous rules, that $7,200 annual loss would have reduced taxable income and delivered a tax refund of around $2,800, bringing the real cost down to $4,400 for the year. Under the new rule, there's no immediate tax benefit unless the buyer owns other residential investment property that's producing income. The $7,200 loss is banked and used later when the property is sold or starts making a profit.

How much deposit you'll need and when mortgage insurance applies

Most lenders will lend up to 80 per cent of the property value without requiring Lenders Mortgage Insurance. Borrow more than that and you'll pay a one-off LMI premium, which can be added to the loan or paid upfront. The premium increases as the loan to value ratio climbs. At 85 per cent it might add a few thousand dollars. At 90 per cent it can be $15,000 or more depending on the loan amount.

Some lenders allow up to 95 per cent for investment loans if you meet specific criteria, but policies vary and the LMI premium at that level is substantial. Borrowing at 80 per cent or below avoids the premium entirely and usually gives you access to better interest rate discounts. For a Surry Hills apartment, where body corporate fees and council rates are higher than in many outer suburbs, keeping your borrowing below 80 per cent also leaves more room in your serviceability buffer.

If you already own property, you may be able to use equity in that property as security instead of saving a cash deposit. Lenders will typically lend up to 80 per cent of the combined value of all properties offered as security. This can be a faster way to build a portfolio, but it increases your overall debt and ties multiple properties to the same loan structure. Refinancing later to split securities or release equity from one property can involve discharge and registration costs.

Variable or fixed rates for property investment

Variable rates move with the market and give you full flexibility to make extra repayments, redraw funds, or exit the loan without penalties. Fixed rates lock in your interest cost for a set period, usually one to five years, but come with restrictions on extra repayments and break costs if you exit early.

For investment loans, most borrowers lean toward variable or a split between variable and fixed. Rental income can be unpredictable, tenants move out, and you may want the option to sell or refinance without paying break fees. A variable loan also lets you take advantage of offset accounts, which reduce the interest you're charged without reducing the loan balance or your deduction.

If you do fix part of the loan, make sure the fixed portion aligns with how long you expect to hold the property in its current structure. Breaking a fixed rate investment loan to refinance or sell can cost thousands of dollars depending on how far rates have moved since you locked in. Lenders calculate break costs based on the difference between your fixed rate and the wholesale rate they can now earn on the money for the remaining fixed period. Those costs are not tax deductible.

What Surry Hills investors should know about location and serviceability

Surry Hills sits within walking distance of the CBD, Central Station and major employment hubs, and has a high concentration of cafes, bars and creative businesses. The area attracts young professionals, couples and small households who value proximity to work and lifestyle amenity. Vacancy rates in the inner city have historically been low outside of disruption periods, and rental demand has remained solid since borders reopened and office occupancy returned.

From a lending perspective, Surry Hills properties are generally well-regarded by lenders because of the suburb's location, transport links and established rental market. Some lenders apply postcode-based policies that treat inner-city apartments differently from houses in outer suburbs, particularly around loan-to-value limits and apartment size or type. Properties under 50 square metres or in buildings with a high proportion of short-term rental use can be harder to finance at higher loan amounts. Serviced apartment-style developments or buildings with restrictive by-laws around leasing may be flagged during the valuation or credit assessment.

If you're comparing properties in Surry Hills, check the strata report for any special levies, sinking fund balance and whether the building has completed or requires major works. Lenders will sometimes reduce the valuation or decline the loan if a large special levy is pending or the sinking fund is underfunded relative to the building's age and condition.

Maximising your borrowing capacity before you apply

Borrowing capacity is calculated using your income, existing debts, living expenses and the expected rental income from the investment property. Lenders also apply the serviceability buffer and assess the loan at a rate higher than you'll actually pay.

Before applying, reduce or pay out any high-limit credit cards, personal loans or buy-now-pay-later accounts. Even if the balance is zero, lenders assess the full limit as potential debt. A credit card with a $20,000 limit might reduce your borrowing capacity by $80,000 or more depending on the lender's assessment rate. If you're not using the card, close it before you apply.

If you're self-employed or earn commission or bonus income, gather at least two years of tax returns, notices of assessment and recent business financials if applicable. Lenders will average your income over two years and may exclude irregular bonus payments unless they're consistent and documented. The same applies to rental income from other properties. If a property has been tenanted for less than 12 months, some lenders will reduce the amount they'll accept or require a signed lease and rent ledger.

Reducing your everyday expenses won't change your borrowing capacity as much as clearing debt, but it helps at the margin. Lenders use either your declared living expenses or a benchmark figure based on your household size and income, whichever is higher. If your spending is significantly above the benchmark, you may be asked to explain or justify it.

When to consider a loan health check or refinance

Once your investment loan settles, it's worth reviewing it every two to three years or whenever your fixed rate ends. Lenders regularly change their pricing and policies, and the rate you're paying now may no longer reflect what's available in the market.

A loan health check compares your current rate and features against what you could access if you refinanced or negotiated with your existing lender. Refinancing to a lower rate reduces your interest cost and can improve cash flow, especially if you're holding the property on interest only and want to reinvest the saving. It can also be an opportunity to release equity from properties that have increased in value, restructure your loans to separate securities, or consolidate debt.

If you're planning to buy another property, refinancing your existing investment loan before you apply for the next one can increase your borrowing capacity by reducing the interest rate used in the serviceability calculation. Even a 0.5 per cent reduction in rate can add tens of thousands of dollars to what you can borrow, depending on your income and debt position.

WealthStreet Mortgage Brokers works with property investors across Surry Hills and the inner city. We compare investment loan options from lenders across Australia and help you structure your borrowing to suit your goals, whether that's cash flow, portfolio growth, or tax efficiency. Call one of our team or book an appointment at a time that works for you.

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