How to Assess Risk on an Investment Loan

Lenders Test Your Serviceability at 3 Per Cent Above the Loan Rate

When you apply for an investment loan, every lender must assess whether you can service the repayments at an interest rate at least 3 percentage points above the product rate. That buffer has been in place since late 2021 and applies whether you are buying your first rental or adding a fifth property to your portfolio. The buffer means that if the loan rate is 6 per cent, the lender calculates your serviceability at 9 per cent.

Consider a police officer working full-time with a household income of $130,000, applying for a $500,000 investment loan on an interest-only basis. At the product rate, monthly repayments might be around $2,500. At the buffered rate, repayments are calculated at roughly $3,750 per month. The lender tests whether your income, minus all current debts and living expenses, can cover that higher figure. If rental income is included, most lenders will shade it by 20 to 30 per cent to account for vacancy and maintenance. A property renting for $2,000 per month might be credited as $1,400 or $1,500 in the assessment. That rental credit helps but does not remove the serviceability hurdle. Shift work, overtime and allowances can all be included in your application if they are regular and verifiable, which makes the assessment more straightforward for police officers than for many other occupations.

Debt-to-Income Limits Apply to New Investor Lending from February 2026

Every lender now operates under a cap that restricts high-DTI lending to 20 per cent of new investor loans each quarter. The cap applies where your total debt, including the new loan, is six times your gross annual income or more. The limit does not prevent you from borrowing at a high DTI, but it does mean lenders manage their allocation carefully and may tighten serviceability or require larger deposits when they approach the quarterly threshold.

In a scenario where your household income is $140,000 and you want to borrow $800,000 for an investment property, your DTI would sit at approximately 5.7, just under the six-times threshold. If you were seeking $900,000, the DTI would be 6.4, and your application would count toward the lender's 20 per cent allocation for high-DTI investor loans. Some lenders exhaust that allocation early in the quarter, others manage it through pricing or LVR caps rather than outright declines. If you are applying in the second half of a calendar quarter and your DTI is above six, expect the lender to take a closer look at your deposit size, rental yield and existing debt commitments. Speaking with a broker who tracks lender appetite across the quarter can save you from applying to a lender that has already hit the cap.

Investment Loans Carry Higher Risk Weights Than Owner-Occupied Lending

Lenders hold more capital against investment loans than they do against owner-occupied loans at the same LVR. That capital requirement flows through to pricing, which is why investor rates are typically higher. The difference in risk weighting increases further if the loan is interest-only or if the LVR exceeds 80 per cent. A loan written at 85 per cent LVR on an interest-only basis attracts a higher capital charge than the same loan written at 80 per cent LVR on a principal-and-interest basis, and that cost is passed to you through the rate and the LMI premium.

If you are refinancing an investment loan and the current LVR has dropped below 80 per cent due to repayments or property value growth, switching to a principal-and-interest structure can reduce your rate. Some lenders also offer better pricing to police officers through occupation-based discounts. Those discounts are not universal, but they can be worth 0.15 to 0.25 percentage points depending on the lender and your loan size. That saving compounds over the life of the loan and improves cash flow if you are holding the property for income rather than immediate sale.

Vacancy Risk and Rental Income Are Factored Into Every Assessment

Lenders assume your investment property will sit vacant for part of the year and reduce the rental income they credit accordingly. The shading varies by lender but typically sits between 20 and 30 per cent. A property generating $24,000 in annual rent might be credited as $16,800 to $19,200 in the serviceability calculation. The remaining shortfall between loan repayments and credited rental income must be covered by your salary or other income.

For police officers on roster, the inclusion of allowances and penalty rates strengthens your position here. If your base salary is $95,000 but your total income including allowances is $115,000, the lender will generally use the higher figure provided you can show consistency over the previous 12 months. That extra $20,000 in assessable income can be the difference between approval and decline when rental income alone does not cover the gap. If you are buying in a location with higher vacancy rates or lower rental yields, the lender may apply a larger discount or require a lower LVR to offset the risk. Investors targeting inner-city apartments with body corporate fees above $4,000 per year should expect those fees to reduce net rental income in the lender's assessment, even though body corporate costs are a claimable expense.

Lenders Treat Existing Investment Debt Differently Depending on Whether It Is Positively or Negatively Geared

If you already own an investment property and are applying for a second loan, the lender will assess the cash flow position of your existing property. A negatively geared property increases your total monthly commitments, which reduces your borrowing capacity for the new loan. A positively geared property, or one that breaks even after tax, has little or no impact on capacity and in some cases can improve it.

When you apply for your second or third investment loan, bring rental statements, lease agreements and tax returns that show the income and expense position of each property. If a property is negatively geared by $8,000 per year, that is roughly $660 per month in additional commitment the lender must account for. If you have offset account balances that reduce the effective interest cost on your existing loans, those offsets do not reduce the loan balance in the lender's LVR calculation, but they do reduce the actual repayment amount you are making, which can improve serviceability in some assessments. Lenders differ in how they treat offset balances and rental income, so the structure you use on your first property affects how much you can borrow for your second.

LMI Premiums Increase Sharply Above 80 Per Cent LVR for Investment Loans

If your deposit is less than 20 per cent of the property value, you will pay LMI. The premium is calculated on a sliding scale based on loan amount and LVR, and it is materially higher for investment loans than for owner-occupied loans at the same LVR. An investor borrowing $450,000 at 85 per cent LVR might pay $8,000 to $12,000 in LMI, depending on the insurer and lender. At 90 per cent LVR, that premium can exceed $18,000.

Police officers have access to LMI waivers on owner-occupied lending through several lenders, but those waivers do not extend to investment loans. If you are buying an investment property with a deposit below 20 per cent, the LMI premium is unavoidable. You can capitalise the premium into the loan amount, which means you do not pay it upfront, but it increases your total debt and your ongoing repayments. Some states charge stamp duty on the LMI premium itself, which adds another layer of cost. If you are close to the 80 per cent threshold, contributing an additional $10,000 or $15,000 to reach that level can save you several times that amount in LMI and improve your interest rate.

Lenders May Apply Exceptions to Serviceability Policy in Certain Circumstances

Serviceability exceptions account for less than 5 per cent of new lending, but they do exist. An exception allows a lender to approve a loan that falls outside standard policy, provided the overall risk remains within the institution's appetite. Police officers with strong employment stability, low existing debt and a history of meeting financial commitments are more likely to be considered for an exception than applicants in less stable roles.

If your application is marginal on serviceability but you have a 30 per cent deposit, minimal personal debt and a clear history of managing rental property, a broker can escalate the application to the lender's credit team for manual assessment. That process takes longer than an automated approval, but it opens the door to outcomes that would otherwise be declined. Exceptions are not granted for borrowers who fail to meet responsible lending obligations or who cannot demonstrate genuine capacity to service the loan. They are a tool for managing borderline cases where the automated assessment does not reflect the borrower's actual financial position.

Portfolio Growth Is Limited by Your Total Debt Serviceability, Not by the Number of Properties

There is no regulatory cap on the number of investment properties you can own, but your ability to borrow is constrained by your total debt serviceability. Each additional property adds rental income and debt commitment to your profile, and the net position determines whether you can borrow again. If your portfolio is negatively geared, each property reduces your capacity for the next. If your portfolio is positively geared or neutral, you can continue to expand as long as your income supports the serviceability buffer on each new loan.

For police officers looking to build a portfolio, the most sustainable approach is to target properties with strong rental yields and manageable holding costs, rather than relying on capital growth alone to justify the next purchase. A property that washes its face in terms of cash flow allows you to borrow again without waiting years for equity growth. If you are holding properties on interest-only loans, the switch to principal and interest on your earlier loans can release capacity for new borrowing by reducing the assessed repayment amount and lowering the LVR on your existing properties. Structuring your portfolio with a mix of fixed and variable rates also reduces refinancing risk if rates rise sharply during a fixed term.

Investment lending is tighter than it was five years ago. Lenders assess every application against serviceability buffers, DTI caps, risk-weighted capital rules and vacancy assumptions that were not in place a decade ago. Police officers have stable income and occupation-based benefits that help, but those advantages do not override the regulatory framework. Call one of our team or book an appointment at a time that works for you.

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