The Costs and Rewards of Investment Property Loans

Buying an investment property in Double Bay or the surrounding eastern suburbs requires a clear understanding of how lenders assess your application and what you can afford to borrow.

Most buyers underestimate how much deposit they need or overestimate how much rental income will reduce their repayments. Investment loans are assessed differently to owner-occupier loans, and those differences directly affect your borrowing power, your interest rate, and how much you need upfront.

How Much Deposit Do You Need for an Investment Property?

You need at least a 10 per cent deposit plus stamp duty and other settlement costs. Lenders calculate the loan-to-value ratio on the purchase price, and most will lend up to 90 per cent if you pay Lenders Mortgage Insurance. However, loans above 80 per cent LVR attract higher premiums and stricter serviceability tests, particularly for investment loans.

Consider a buyer looking at a unit in Rushcutters Bay at the suburb's median of around $1,200,000. A 10 per cent deposit is $120,000, LMI at 90 per cent LVR might add another $30,000 to $40,000, and stamp duty in New South Wales on an investment property at that price is roughly $52,000. That buyer would need close to $210,000 in total funds to proceed, and the LMI premium would be capitalised into the loan or paid upfront.

If you already own property, you may be able to release equity from your existing home to cover part or all of the deposit. This reduces the cash you need at settlement but increases your overall debt, so serviceability becomes the main constraint rather than deposit size.

How Lenders Assess Rental Income on Investment Loans

Lenders use rental income to improve your serviceability, but they do not credit the full amount. Most lenders apply a shading factor of 80 per cent, meaning only 80 per cent of the expected rent is included in your income assessment. This accounts for vacancy periods, maintenance costs and leasing gaps.

For a unit in Rushcutters Bay renting at $650 per week, the lender would assess $520 per week as income. Over a year, that's approximately $27,000 credited to your serviceability, while the actual rent collected would be $33,800. The $6,800 difference is treated as a buffer the lender holds back.

In addition, lenders must assess your ability to service the loan at an interest rate at least 3.0 percentage points above the actual rate on the product. If the variable rate on the investment loan is 6.5 per cent, the lender tests your capacity at 9.5 per cent. This buffer has been in place since October 2021 and applies to all new borrowers at banks, credit unions and building societies regulated by APRA.

Interest Only or Principal and Interest Investment Loans

Interest-only repayments reduce your monthly commitment and preserve cash flow, which is why they remain common for property investors. On a $1,000,000 loan at 6.5 per cent, the interest-only repayment is roughly $5,400 per month. The same loan on principal and interest would cost around $6,300 per month.

However, interest-only loans are generally priced higher than principal-and-interest loans, with rate premiums of 0.2 to 0.5 percentage points depending on the lender. Interest-only periods are typically capped at five years, after which the loan reverts to principal and interest unless you apply to extend or refinance the investment loan.

From a tax perspective, all interest on an investment loan is deductible if the property is genuinely rented or available for rent. That deduction applies regardless of whether the loan is interest-only or principal-and-interest. Only the interest component is deductible, so paying down principal does not increase your tax benefit.

For established properties purchased after 12 May 2026, losses from the property can only be offset against other residential property income from the 2027-28 income year onward. Properties held before that date, and new builds purchased after that date, continue to allow losses to be offset against salary and wage income. If you are comparing an established unit in Bondi Junction with a new apartment in the same postcode, the tax treatment differs materially depending on when the dwelling was first occupied.

Variable Rate or Fixed Rate Investment Loans

Most buyers in Double Bay choose variable rates for investment properties because they offer offset accounts, unrestricted extra repayments, and no break costs if you sell or refinance early. Fixed rates lock in your repayment for a set period, typically one to five years, but they do not allow offset facilities and charge break fees if you exit the loan before the fixed term ends.

Variable rates on investment loans currently sit around 6.3 to 6.7 per cent depending on your deposit size and the lender. Fixed rates for investment loans tend to be priced similarly or slightly lower for shorter terms, but the lack of flexibility makes them less suitable unless you have a specific reason to lock in certainty.

If you are self-employed, lenders assess your income using tax returns and often average your income over two years. A buyer with variable self-employment income may prefer a variable rate loan with an offset account, as this allows surplus cash to sit in offset and reduce interest without being locked into the loan structure.

Debt-to-Income Lending Limits and Investment Loans

From 1 February 2026, APRA introduced a cap requiring banks to limit investor lending at six times income or higher to no more than 20 per cent of new loans. This cap applies separately to investment loans and owner-occupier loans, and it can reduce how much you can borrow if your total debt across all properties is high relative to your income.

For a self-employed buyer in Double Bay earning $250,000 per year after business expenses, six times income is $1,500,000. If you already have $800,000 owing on your home and want to borrow another $1,000,000 for an investment property, your total debt would be $1,800,000, which exceeds the six-times threshold. That does not mean you cannot proceed, but it does mean the lender must limit how many of these high-DTI loans they approve, and you may face a higher rate or a requirement to reduce the loan amount.

The cap does not apply to non-bank lenders, so if your DTI is above six and a major bank declines or restricts your application, a non-bank may still be able to lend the full amount. However, non-bank rates are typically 0.3 to 0.8 percentage points higher than the big four banks.

What Happens to Capital Gains Tax from 1 July 2027

For investment properties purchased now and sold after 1 July 2027, capital gains are taxed under a split method. Gains that accrue before 1 July 2027 are taxed under the current 50 per cent discount for assets held longer than 12 months. Gains that accrue after 1 July 2027 are indexed to inflation, and a 30 per cent minimum tax rate applies to the real gain.

If you buy an established unit in Woollahra now for $1,700,000 and sell it in five years for $2,200,000, part of that $500,000 gain will be taxed under the old rules and part under the new rules. You can either obtain a valuation as at 1 July 2027 or use an ATO apportionment method to split the gain. For new builds, you can choose between the old discount method and the new indexed method at the time you sell, giving you flexibility to pick whichever results in a lower tax bill.

New builds are defined as dwellings constructed on vacant land or developments that increase the total number of dwellings on the site. A knock-down rebuild that replaces one house with one house does not qualify. A new build that has been occupied by the developer or another owner for more than 12 months before you purchase it also loses its eligibility for the tax concessions.

Does Buying in Double Bay or Nearby Suburbs Affect Your Loan

Lenders do not treat Double Bay, Bellevue Hill, Darling Point or surrounding prestige suburbs as higher risk, but they do apply stricter valuation scrutiny. House medians in Bellevue Hill sit above $12,000,000, in Double Bay around $8,300,000, and in Rose Bay near $7,000,000, but transaction volumes are thin. A single large sale can shift the reported median by 10 to 20 per cent in a given quarter.

Valuers in this corridor are conservative, and lenders typically require a full valuation rather than an automated assessment for any property above $3,000,000. If the valuation comes in below the contract price, the lender calculates your LVR on the lower figure, which increases the deposit you need or triggers an LMI requirement you were not expecting.

For buyers comparing units, Bondi Junction and Paddington offer the highest transaction volumes and the most liquid markets in the eastern suburbs. Paddington had 239 house sales in the past 12 months, compared to 21 in Double Bay and just 10 in Darling Point. Higher liquidity generally means more confident valuations and fewer delays at settlement.

Stamp Duty and Other Upfront Costs for Investment Property

Stamp duty on investment property in New South Wales is calculated on the same scale as owner-occupied property, but there is no access to concessions or exemptions available to first home buyers. For a $2,000,000 investment property, stamp duty is approximately $87,000. For a $1,200,000 unit, it is roughly $52,000.

Other upfront costs include building and pest inspections, strata reports if buying a unit, conveyancing fees, and loan establishment fees if the lender charges them. Most lenders have removed establishment fees for investment loans, but some still charge between $600 and $1,000.

If you are capitalising LMI into the loan, the insurer may also charge state-based stamp duty on the premium itself in some states, though this does not currently apply in New South Wales. All of these costs are claimable as deductions over five years for investment properties, or immediately if they relate to borrowing costs such as loan application fees and LMI premiums.

Call one of our team or book an appointment at a time that works for you. We work with self-employed professionals and salaried buyers across Double Bay and the eastern suburbs, and we can structure your investment property loan to fit your income, your deposit, and your plans for portfolio growth.

Frequently Asked Questions