Unlock the Secrets to Investment Loan Approval

Getting approved for an investment loan as a public servant depends on how lenders assess your income stability, existing debt, and the property's rental potential.

How Lenders Assess Your Application

Lenders examine three core elements: your ability to service the loan under a stressed interest rate scenario, the loan to value ratio, and whether your employment fits their risk appetite. Every lender applies a serviceability buffer of three percentage points above the product rate, meaning a loan at 6.2 per cent variable is tested at 9.2 per cent. That buffer matters more when your deposit is smaller or you already carry other debts.

Public sector employment typically strengthens your application because tenure is verifiable and income is consistent. Lenders distinguish between base salary, allowances, and shift penalties. Your base salary is assessed at 100 per cent of the stated amount. Most allowances that appear on every payslip, such as higher duties or location allowances, are included at 80 per cent. Overtime and penalties that fluctuate are either discounted further or excluded unless you can show a two-year history at the same level.

Consider a public servant earning a base salary of $95,000 plus a permanent location allowance of $8,000. The lender will assess serviceability on $101,400, not $103,000. That difference reduces borrowing capacity by several thousand dollars depending on other commitments.

What the Debt-to-Income Cap Means for Investors

From 1 February 2026, lenders can approve no more than 20 per cent of their new investor loans at a debt-to-income ratio of six times or higher. Debt-to-income is calculated by dividing your total debt, including the new loan, by your gross annual income. If your income is $100,000 and your total borrowing, including the investment loan, reaches $650,000, your DTI is 6.5, and you fall into the capped portion of the lender's book.

That cap does not block your application, but it does mean lenders prioritise applicants with lower ratios or larger deposits when allocation tightens. If you are near the threshold, reducing personal debt before applying or increasing your deposit by even five per cent can shift your application into the uncapped category. In our work with public servants, we see this issue surface most often when an applicant carries a car loan or has recently consolidated credit card debt without closing the accounts.

Rental Income and How It Is Counted

Lenders do not count rental income dollar for dollar. Most apply a shading rate, accepting between 70 and 80 per cent of the expected rent to account for vacancy periods, maintenance, and the possibility of tenant default. If a property is expected to generate $550 per week, the lender will use between $385 and $440 in the serviceability calculation.

Vacancy assumptions vary by postcode and property type. A two-bedroom unit in an area with high investor activity may attract a lower shading rate than a four-bedroom house in a suburb with strong owner-occupier demand. Lenders also look at whether the area has oversupply, particularly in apartment markets where multiple developments have settled in recent years. That context influences both the rental income assumption and the valuation.

If you already own one investment property, the rental income from that property is also shaded when you apply for a second loan. The cumulative effect of shading across multiple properties reduces your capacity faster than the rent alone would suggest.

Interest Only Repayments and Approval Settings

Most investors choose interest only loans for the first five years to keep repayments lower and preserve cash flow. Lenders assess these applications using principal and interest repayments at the higher stressed rate, even though you will only pay interest during the initial period. That means approval is based on your ability to service a principal and interest loan at a rate three percentage points higher than the actual product rate.

In a scenario where an investor applies for a $500,000 loan at a variable rate of 6.3 per cent on an interest only basis, the lender will test serviceability at 9.3 per cent on a principal and interest basis over the full 30-year term. The repayment used in that calculation is roughly $4,050 per month, even though the actual interest only repayment during the first five years will be closer to $2,625 per month.

That gap between what you pay and what you are tested on creates room to hold other investments or manage living costs, but it also means your borrowing capacity is constrained by the higher test figure, not the lower actual repayment.

What Changed with Negative Gearing and Tax Settings

From 1 July 2027, rental losses on residential investment properties purchased on or after 7:30pm AEST on 12 May 2026 can only be offset against other residential rental income or carried forward. Those losses cannot reduce your salary income for tax purposes unless the property qualifies as an eligible new build.

Properties you already own, or those you contracted to buy before that date and time, are not affected. Those properties continue under the previous tax treatment, where rental losses can be offset against salary or other income. New builds that meet the definition, typically dwellings constructed on previously vacant land or developments that increase dwelling numbers, also retain full negative gearing.

Lenders are now asking at the time of application whether the property is an eligible new build and whether the contract was signed before or after the threshold date. That information does not change the approval itself, but it does affect the post-tax cash flow position and the long-term viability of holding the property if rental income does not cover the loan repayment and other costs.

If you plan to rely on negative gearing to offset salary income, you need to either purchase an eligible new build or ensure the property was contracted before the cut-off. Otherwise, the rental loss is quarantined and your after-tax position will be weaker than it would have been under the previous rules.

Deposit Requirements and Lenders Mortgage Insurance

Most lenders require a minimum 10 per cent deposit for investment loans, though some will lend at higher loan to value ratios if you pay Lenders Mortgage Insurance. LMI is a one-off premium that protects the lender if you default and the sale of the property does not cover the outstanding debt. The premium increases as the LVR rises, and it is capitalised into the loan unless you pay it upfront.

Public servants may have access to LMI waivers on investment loans up to 90 per cent LVR with select lenders, though policy settings differ depending on your employer, salary level, and whether you have other investment debt. That waiver can reduce the upfront cost by several thousand dollars and improve cash flow during the first year of ownership.

If you plan to use equity from your home to fund the deposit, lenders will assess the combined position. The total lending across both properties must still meet serviceability and LVR requirements. Releasing equity increases your debt without increasing your income, so the buffer calculation becomes tighter. If you are already near your maximum capacity, equity release may not leave enough room for the new investment loan unless you restructure or reduce other commitments.

Application Timing and Valuation Risk

Lenders order a valuation once your application is conditionally approved. If the valuation comes in below the contract price, the lender will only lend against the lower figure. That leaves you to find the shortfall or renegotiate the contract. Valuation risk is higher in markets where recent sales data is thin or where the property type is less common.

To reduce that risk, check recent sales in the same street or building before signing the contract. If comparable sales are limited or the asking price sits well above recent transactions, consider whether the property will meet lender expectations. A valuation shortfall does not always kill the deal, but it does mean you need access to additional funds or the flexibility to walk away if the contract allows.

Timing also affects interest rate lock-in. Some lenders allow you to lock a rate for up to 90 days from formal approval, but others only lock once the loan settles. If rates are rising and settlement is several weeks away, your approved rate may no longer be available by the time you draw down. Clarify the lock-in policy before you apply, particularly if you are purchasing off the plan or the settlement period is extended.

Call one of our team or book an appointment at a time that works for you to discuss how your income structure, existing debt, and the property you are considering will affect your approval and what steps to take before you apply.

Frequently Asked Questions