How Much Can I Borrow for an Investment Property?

If you’re thinking about buying an investment property, one of your first questions is probably:

How much can I actually borrow?

It sounds like it should have a simple answer. You enter your income into an online calculator and get your number.

In reality, your borrowing capacity depends on much more than your salary.

Things like your income, expenses, existing debts, credit cards, other properties and the lender you choose can all affect how much you may be able to borrow.

And more importantly, different lenders can assess the same person differently.

Here’s what you need to know before setting your property budget.

What determines how much you can borrow?

When a lender assesses your application, they want to understand whether you can afford the new loan alongside your existing financial commitments.

They’ll generally look at things such as:

Your income
Your living expenses
Existing home and investment loans
Credit cards
Car and personal loans
HELP debt
Buy Now Pay Later accounts
Dependants
Expected rental income
Other regular financial commitments

This is why two people earning the same salary can have very different borrowing capacities.

Someone earning $150,000 with minimal debt may have a very different result from someone earning $150,000 with an existing mortgage, car loan, credit card and children.

Lenders don’t just use today’s repayments

Another important part of borrowing capacity is how lenders test whether you could continue making your repayments if your circumstances changed.

For banks regulated by APRA, new home loan applications are currently assessed using an interest rate at least 3 percentage points higher than the actual loan rate.

This is designed to provide some breathing room if interest rates increase or your financial circumstances change.

APRA explains more about the mortgage serviceability buffer here.

So even if you feel comfortable making repayments at today’s interest rate, the lender is assessing your application using a higher rate.

That can have a significant impact on your borrowing capacity.

How is rental income treated?

If you’re buying an investment property, the expected rent can generally be included as part of your income.

However, lenders don’t necessarily count every dollar of rent.

They may use only a percentage of the expected rental income to allow for things like vacancies and property expenses. This is called 'shading' income.

Different lenders can also treat rental income differently.

This becomes particularly important if you already own one or more investment properties, because the way your existing loans and rental income are assessed can affect how much you can borrow next.

Having equity doesn’t automatically mean you can borrow more

If you already own a home, you might be considering using some of its equity towards your investment-property deposit.

But there’s an important distinction:

Having equity and having borrowing capacity are not the same thing.

You could potentially have enough usable equity to cover the deposit and purchasing costs but still not have enough income to support the additional loan.

A lender will still need to assess whether you can afford the new debt.

That’s why it’s worth looking at both your available equity and your borrowing capacity before you start property hunting.

Can credit cards and other debts reduce your borrowing capacity?

Yes.

Credit cards, car loans, personal loans and Buy Now Pay Later accounts can all form part of your overall financial position.

ASIC’s Moneysmart describes credit as money borrowed from a financial provider and includes credit cards and Buy Now Pay Later arrangements among common forms of credit.

You can read Moneysmart’s guide to credit and debt here.

Credit cards can be particularly easy to overlook.

Even if you pay your card off every month, the available limit is still be relevant to a lender’s assessment.

This doesn’t mean you should automatically close every credit card before applying for a loan.

It does mean it’s worth reviewing what you have and whether you actually need it.

What about HELP aka HECS debt?

Your HELP debt can also affect your borrowing capacity because compulsory repayments can reduce the income you have available for other loan repayments.

The Australian Taxation Office sets the repayment rules and income thresholds for study and training loans.

You can find current HELP repayment information through the ATO by clicking here.

Again, this doesn’t mean having a HELP debt stops you from buying an investment property.

It simply becomes one of the factors considered when working out how much you may be able to borrow.

Why can borrowing capacity vary between lenders?

This is probably the most important thing to understand.

You don’t have one borrowing-capacity number that applies to every lender.

Lenders can have different policies and calculations for things like:

Rental income
Bonuses and overtime
Existing debts
Living expenses
Credit cards
Self-employed income
Existing investment properties

So if one bank tells you that you can borrow $600,000, it doesn’t necessarily mean every lender will reach the same result.

This is also why relying on one online borrowing calculator can be misleading.

It’s useful as a starting point, but it isn’t a complete assessment of your options.

How much should you actually borrow?

There’s another question worth asking alongside: “How much can I borrow?”

And that’s:“How much am I comfortable borrowing?”

If a lender is willing to lend you $800,000, you don’t automatically need to spend $800,000.

Think about what those repayments mean for your actual life.

Would you still have an emergency fund?
Could you cover an unexpected repair?
What happens if the property is vacant for a few weeks?
Do you still have enough breathing room to enjoy your life outside of owning property?

The goal isn’t necessarily getting the biggest loan possible.

It’s finding a level of borrowing that works for both the property you want to buy and your wider financial position.

Find out your numbers before you start looking

If you’re serious about buying an investment property, understanding your borrowing position before you start inspecting properties can save you a lot of frustration and time.

Rather than relying on one generic calculator, you can look at your income, expenses, existing debts and deposit or equity and understand how your position may be assessed across suitable lenders by clicking here.

Sometimes there are things affecting your borrowing capacity that you weren’t aware of.

Sometimes another lender may assess your situation differently.

And sometimes the numbers tell you that waiting or buying at a lower price point makes more sense.

If you’re thinking about buying your first investment property and want to understand what your numbers actually look like, I can help you work through your borrowing position and compare how suitable lenders may assess your situation.

Book a call with me by clicking here, I cant wait to chat <3