Beginner's guide to investment loan approval

Getting an investment loan approved involves meeting serviceability requirements based on both your current income and the rental income the property will generate.

Lenders assess investment loan applications differently to owner-occupier loans. Your borrowing capacity depends on your wages, the expected rental income from the property, and how the lender calculates those figures. Most lenders will only count 70-80% of the rental income when they assess whether you can afford the loan, and they'll apply a higher interest rate buffer to the calculation. For Tasmanian Police working shift patterns, understanding how lenders view overtime and allowances can make a material difference to the loan amount you'll be approved for.

How lenders calculate your borrowing capacity for investment loans

Lenders add your assessed rental income to your employment income, then subtract all your existing debts and living expenses to determine what you can borrow. The rental income figure used is typically between 70-80% of the market rent, not the full amount. This discount accounts for vacancy periods, maintenance costs, and potential rental gaps.

Consider a Senior Constable earning $95,000 base salary plus regular shift allowances of $18,000 annually, looking to purchase a two-bedroom unit in Glenorchy with a market rent of $450 per week. The lender might assess rental income at 80%, which equals $360 per week or $18,720 annually. Combined with the base salary and allowances, the total assessed income becomes $131,720. However, the lender will also test this at a higher interest rate than the actual loan rate, often 3% above the variable rate you'll pay, and factor in your current rent or mortgage, car loan repayments, and living costs. This is where many applications fall short, not because the property won't generate income, but because the lender's assessment rate pushes the monthly commitment beyond serviceability limits.

Deposit requirements and LVR considerations

Most lenders require a minimum 10% deposit plus costs for investment properties, though some will lend at 90% loan to value ratio. Borrowing above 80% LVR means paying Lenders Mortgage Insurance (LMI), which protects the lender if you default. For Tasmanian Police, LMI waivers are sometimes available up to 90% LVR depending on rank and years of service, which can save thousands in upfront costs.

Your deposit can come from genuine savings, equity in an existing property, or a combination of both. If you already own a home in Hobart and have built up equity, you might leverage that equity to fund the deposit on an investment property without needing to save additional cash. Lenders will reassess the total debt against your income when you refinance or increase borrowing, so the same serviceability rules apply.

Interest only or principal and interest repayments

Investment loans can be structured as interest only for a period, typically up to five years initially. This approach reduces monthly repayments and maximises your tax deductions, since the interest on an investment loan is claimable. Principal and interest repayments are also available if you prefer to build equity in the property from the start.

Interest only repayments suit investors focused on cash flow and negative gearing benefits. You're only paying the interest component each month, which means lower outgoings and a higher tax deduction. Once the interest only period ends, the loan reverts to principal and interest unless you request an extension. Not all lenders will extend interest only periods, and those that do will reassess your serviceability at that point. If you're planning to hold the property long term and build wealth through capital growth rather than equity reduction, interest only gives you flexibility to direct surplus income elsewhere, whether that's another property deposit or paying down non-deductible debt like your home loan.

Rental income and vacancy rate assumptions

Lenders apply what's called a rental income shading, reducing the actual rent by 20-30% to account for periods when the property might be vacant or require maintenance. This is a standard assessment policy and applies regardless of how strong the rental market is in your area.

Tasmania's rental vacancy rate has been below 1% in recent years, meaning rental demand is high and vacancies are uncommon. However, lenders don't adjust their shading based on local market conditions. They'll still assess your Glenorchy unit at 70-80% of market rent even if you could realistically achieve full occupancy year-round. This conservative approach protects the lender but can reduce your borrowing capacity compared to what the property will actually deliver in rental income. If you're looking at properties in areas with strong rental demand, such as suburbs close to the Royal Hobart Hospital or University of Tasmania campuses, your actual cash flow will likely be better than what the lender's assessment suggests.

How overtime and allowances are treated in applications

Tasmanian Police working rotating rosters often receive shift penalties, overtime, and allowances that form a significant portion of total income. Lenders will include this income if it's been consistent over the past 12-24 months and is evidenced through payslips and tax returns.

The key is consistency and documentation. If your payslips show regular shift allowances over the past two years and your tax return reflects that income, most lenders will include 100% of it in their serviceability assessment. One-off overtime payments or irregular allowances may be averaged or excluded entirely. For officers who've recently been promoted or changed rosters, the assessment can be more complex. Lenders typically want to see at least three to six months of the new income pattern before they'll include it. This is where working with a broker familiar with police pay structures helps, as they know which lenders take a more flexible approach and how to present the income to maximise the assessed amount.

Tax deductions and claimable expenses

The interest on an investment loan is fully tax deductible, as are many other expenses related to owning a rental property. These include property management fees, council rates, building insurance, repairs, and depreciation on fixtures and fittings. Negative gearing occurs when your rental income is less than your total expenses, resulting in a tax loss that reduces your overall taxable income.

For a Tasmanian Police officer in the $120,000 income bracket, the tax benefits can be substantial. If your investment property generates a $10,000 annual loss after all expenses, that loss reduces your taxable income, potentially saving you $3,700 in tax depending on your marginal rate. The actual tax outcome depends on your total income, other deductions, and current tax rates, so it's worth speaking to an accountant who understands property investment. The loan structure you choose affects this calculation. Interest only loans maximise your deductible interest, while principal and interest repayments reduce the loan balance and therefore the interest you can claim over time.

Common reasons investment loan applications are declined

Applications are most often declined due to insufficient serviceability, not enough deposit, or undisclosed debts. Lenders run a credit check that shows all your current credit cards, personal loans, buy now pay later accounts, and other commitments. Even if you don't carry a balance on a credit card, the lender will assume you could draw the full limit and will factor that into their assessment.

In our experience, applicants are sometimes surprised that a $10,000 credit card limit they never use can reduce their borrowing capacity by $30,000 or more. Closing unused accounts before applying for an investment loan can improve your serviceability. Other common issues include not having enough genuine savings if you're borrowing above 80% LVR, or relying on rental income from a property in an area the lender considers oversupplied. Some lenders have postcodes they won't lend against, particularly in areas with high concentrations of new apartments or mining towns with volatile employment. Tasmania doesn't have those same concerns, but if you're looking at interstate investment properties, location can affect both approval and the interest rate offered.

Choosing the right loan structure for your circumstances

Your loan structure should match your investment strategy and cash flow needs. Variable rate loans offer flexibility and the ability to make extra repayments without penalty, while fixed rate loans provide certainty over repayments for a set period. Some investors split their loan between fixed and variable to get both stability and flexibility.

If you're planning to acquire multiple investment properties over the next few years, keeping your loans as separate accounts with their own offset facilities gives you more control. It also makes it easier to sell one property without affecting the others. Body corporate fees, land tax, and strata levies should all be factored into your cash flow projections, particularly if you're purchasing a unit. These costs aren't loan-related, but they affect whether the property generates positive or negative cash flow each month. An investment loan tailored to your roster and income pattern gives you a foundation to build a property portfolio that supports long-term financial goals, whether that's passive income in retirement or portfolio growth over the next decade.

If you're ready to explore investment loan options or want to check your borrowing capacity before you start looking at properties, call one of our team or book an appointment at a time that works for your roster.

Frequently Asked Questions