How to Use Rental Income to Boost Your Borrowing Power for an Investment Property


For many Australians, property investment is a cornerstone of wealth creation. However, securing finance for an investment property can be challenging, especially when your borrowing capacity seems stretched. One of the most powerful tools to enhance your borrowing power is rental income—both from existing properties and the potential rent of the property you intend to purchase. This comprehensive guide explains how Australian lenders assess rental income, the impact of negative gearing, and practical strategies to maximize your borrowing capacity.

Understanding Rental Income Assessment by Australian Lenders

When you apply for an investment property loan, lenders don’t simply add the expected rent to your income. Instead, they apply a conservative assessment approach to account for vacancies, management fees, and other costs. The way rental income is treated can vary significantly between lenders, making it crucial to understand the typical methods used.

Existing Rental Income

If you already own an investment property, lenders will consider the rental income you receive. However, they typically only use a portion of the gross rent—usually between 75% and 80%—to account for expenses such as property management, maintenance, insurance, and rates. Some lenders may also consider the net rental income after deducting actual expenses, but this is less common.

Future Rental Income (Proposed Rent)

For the property you’re buying, lenders will use a rental estimate, often derived from a real estate agent’s rental appraisal or a valuation report. Again, they will shade this income, typically using 75% to 80% of the estimated rent. It’s important to note that lenders may cap the rental income at a certain percentage of the property’s value or loan amount to prevent over-reliance on optimistic rent projections.

How Lenders Treat Rental Income in Serviceability Calculations

Serviceability is the lender’s assessment of your ability to repay the loan. Rental income is integrated into this calculation, but its treatment can differ based on whether the lender uses a simple or comprehensive model.

• Simple serviceability models: Some lenders use a basic income-to-expense ratio, where rental income is added to your employment income, and a standard expense benchmark (like the Household Expenditure Measure, or HEM) is applied.
• Comprehensive serviceability models: Other lenders conduct a detailed analysis of your actual income and expenses, including the net cash flow from all investment properties. This method can be more favorable if your properties are positively geared, but it may reduce your borrowing capacity if you have multiple negatively geared properties.

Most major Australian lenders now use comprehensive credit reporting and detailed serviceability calculators that factor in all debts, living expenses, and the net rental position of your entire portfolio.

The Impact of Negative Gearing on Borrowing Capacity

Negative gearing occurs when the costs of owning an investment property—such as interest on the loan, maintenance, and depreciation—exceed the rental income, resulting in a net loss. This loss can be deducted from your taxable income, reducing your tax bill. While negative gearing can offer tax benefits, it can also reduce your borrowing capacity because lenders view the ongoing loss as a liability.

How Lenders Account for Negative Gearing

When assessing serviceability, lenders will typically add back non-cash deductions like depreciation and then subtract the net rental loss from your income. However, some lenders treat negative gearing more harshly than others. For example:

• Lender A might add back depreciation and only deduct the actual cash shortfall.
• Lender B might ignore the tax benefit entirely and deduct the full loss from your income.

This discrepancy means that your borrowing power can vary significantly between lenders, especially if you have a negatively geared portfolio. Understanding each lender’s policy is essential.

Strategies to Mitigate Negative Gearing Impact

• Choose a lender with favorable negative gearing treatment: Some lenders are more accommodating by considering the tax refund you receive from negative gearing as additional income. This can substantially increase your borrowing capacity.
• Consider fixing interest rates: If interest rates rise, your negative gearing loss increases, further reducing borrowing capacity. Fixing rates can provide certainty and potentially improve serviceability if the fixed rate is lower than the variable rate used in the assessment.
• Increase rental income: Renovating or improving the property can boost rent, turning a negatively geared property into a neutrally or positively geared one over time.

Serviceability Calculations: A Detailed Breakdown

To truly understand how rental income affects your borrowing power, let’s walk through a typical serviceability calculation used by Australian lenders.

Step 1: Calculate Gross Income

Lenders start with your gross employment income, any existing rental income (shaded), and other income sources like dividends or bonuses.

Step 2: Deduct Expenses

Expenses include:

• Living expenses (often based on HEM or your declared expenses, whichever is higher)
• Existing loan repayments (including principal and interest on all properties)
• Credit card and personal loan commitments
• Negative gearing losses (if applicable)

Step 3: Apply Assessment Rate

Lenders don’t use the actual interest rate you’ll pay. Instead, they apply an assessment rate, which is typically the lender’s standard variable rate plus a buffer (usually 3%). As of 2025, with the cash rate around 4.35%, assessment rates are often above 8%. This ensures you can afford repayments if rates rise.

Step 4: Calculate Surplus

The surplus after all deductions is your net disposable income. This surplus must be sufficient to cover the proposed new loan repayments at the assessment rate.

Example Calculation

Let’s assume:

• Employment income: $120,000 p.a.
• Existing rental income (shaded at 80%): $20,000 p.a. (from a property generating $25,000 gross rent)
• Living expenses: $30,000 p.a.
• Existing loan repayments: $25,000 p.a.
• Proposed new loan: $500,000 at an assessment rate of 8.5% p.a. (interest-only for investment)

Income: $120,000 + $20,000 = $140,000 Expenses: $30,000 + $25,000 = $55,000 Net income before new loan: $85,000

Proposed loan repayment: $500,000 × 8.5% = $42,500 p.a. (interest-only)

Surplus: $85,000 - $42,500 = $42,500

If the lender requires a minimum surplus of, say, $20,000, this applicant would pass serviceability. Note that if the rental income were excluded, the surplus would be only $22,500, barely above the threshold.

Comparison of Lender Assessment Methods

Data based on typical lender policies as of 2025.

Tips to Maximize Your Borrowing Capacity Using Rental Income

1. Choose the Right Lender

Not all lenders are equal when it comes to rental income assessment. Some lenders use a higher shading percentage, while others are more generous with negative gearing. A mortgage broker can help you compare lenders and find the one that maximizes your borrowing capacity.

2. Provide a Strong Rental Appraisal

For the property you’re buying, obtain a detailed rental appraisal from a reputable local agent. Ensure the appraisal is realistic and supported by comparable rentals. A higher appraisal can directly increase your borrowing power, but be cautious—overly optimistic appraisals may be rejected by the lender’s valuer.

3. Reduce Existing Debts

Paying down credit cards, personal loans, and car loans reduces your monthly commitments, freeing up more income for the new loan. Even small reductions can have a significant impact because lenders assess limits, not just balances.

4. Consider Interest-Only Loans

Interest-only repayments are lower than principal and interest, which improves serviceability. While interest-only loans have become harder to obtain due to regulatory changes, they remain a viable option for investors seeking to maximize cash flow.

5. Leverage Tax Benefits

If you’re negatively geared, ensure you claim all allowable deductions, including depreciation. Some lenders will consider the tax refund as income if you can demonstrate a consistent history of receiving it. A tax variation withholding (PAYG withholding variation) can also boost your take-home pay, which lenders may consider.

6. Rent Out Your Primary Residence

If you’re planning to move and rent elsewhere, you could convert your existing home into an investment property. The rental income from your former home can then be used to boost your borrowing capacity for the new purchase.

7. Increase Rents on Existing Properties

Review your current rental income. If it’s below market, consider raising the rent (where legally permissible) before applying for a new loan. Even a small increase can improve your overall serviceability.

Common Pitfalls to Avoid

• Overestimating rental income: Lenders are conservative. If the valuer’s rental estimate is lower than your appraisal, your borrowing capacity will be based on the lower figure.
• Ignoring the assessment rate: Many borrowers focus on the actual interest rate, but lenders use a much higher assessment rate. Ensure you can afford repayments at that rate.
• Not accounting for all expenses: Lenders include notional expenses for property management and maintenance, even if you self-manage. These deductions reduce your net rental income.
• Applying with the wrong lender: A lender who is strict on negative gearing or uses a high shading percentage can significantly reduce your borrowing capacity.

The Role of Lenders Mortgage Insurance (LMI)

If your deposit is less than 20%, you’ll likely need to pay LMI. LMI providers also assess serviceability, and their criteria can be stricter than the lender’s. They may apply their own shading to rental income or have different policies on negative gearing. When borrowing with a high LVR, ensure your rental income is robust enough to satisfy both the lender and the insurer.

How to Calculate Your Borrowing Power with Rental Income

You can use online borrowing power calculators, but they often oversimplify the assessment. For a more accurate estimate, follow these steps:

1. List all income sources: Employment, rental (shaded at 80%), and any other.
2. List all debts and expenses: Home loans, credit cards, personal loans, HEM or actual living expenses.
3. Calculate net rental position: For each investment property, subtract all expenses (including interest at the assessment rate) from the shaded rental income. This gives the net surplus or deficit.
4. Apply the assessment rate buffer: Use the lender’s assessment rate (e.g., 8.5%) to calculate repayments on the new loan.
5. Check surplus: Ensure the remaining income exceeds the lender’s minimum threshold.

For a precise calculation, consult a mortgage broker or use a comprehensive serviceability calculator that incorporates specific lender policies.

Case Study: Maximizing Borrowing Capacity

Scenario: John earns $150,000 p.a. and owns an investment property worth $800,000 with a $400,000 loan (interest-only at 6% p.a.). The property rents for $600 per week, but he only receives 80% shading, so $24,960 p.a. His expenses (interest, management, rates, etc.) total $30,000 p.a., so he is negatively geared by $5,040 p.a.

John wants to buy another investment property for $700,000 with a $560,000 loan (80% LVR). The proposed rent is $550 per week.

Lender A: Shades rental income at 80%, deducts full negative gearing loss, uses assessment rate of 8.5%.

• Income: $150,000 + $24,960 = $174,960
• Expenses: Living $30,000 + existing loan interest $24,000 (6% actual) + negative gearing loss $5,040 = $59,040
• Net: $115,920
• New loan repayment: $560,000 × 8.5% = $47,600
• Surplus: $68,320 (pass)

Lender B: Shades rental at 75%, adds back depreciation and considers tax refund, assessment rate 8%.

• Income: $150,000 + ($600×52×0.75) = $150,000 + $23,400 = $173,400
• Expenses: Living $30,000 + existing loan interest $24,000 + negative gearing loss (after adding back $5,000 depreciation) = $0 (net neutral after tax refund considered)
• Net: $143,400
• New loan repayment: $560,000 × 8% = $44,800
• Surplus: $98,600 (very strong pass)

This illustrates how lender choice can dramatically affect the outcome.

FAQ

How much rental income do Australian lenders typically consider?

Most lenders use 75% to 80% of the gross rental income to account for expenses such as property management, maintenance, and vacancies. Some specialist lenders may use up to 90% in certain circumstances, but this is less common.

Does negative gearing reduce my borrowing capacity?

Yes, negative gearing can reduce your borrowing capacity because lenders treat the net rental loss as an expense. However, some lenders are more lenient by adding back depreciation or considering the tax refund, which can mitigate the impact.

Can I use future rental income from the property I’m buying to qualify for the loan?

Absolutely. Lenders will use an estimated rental income (usually from an appraisal) and shade it by 20-25%. This expected rent is included in your serviceability calculation to help you qualify for the loan.

What is the best way to maximize my borrowing capacity using rental income?

To maximize your borrowing capacity, choose a lender with favorable rental income and negative gearing policies, provide a strong rental appraisal, reduce existing debts, consider interest-only repayments, and ensure your existing properties are rented at market rates.

Do all lenders treat rental income the same way?

No, there is significant variation. Some lenders are more conservative, while others are more generous with shading percentages and negative gearing treatment. Using a mortgage broker can help you identify the best lender for your situation.

References

1. Australian Securities and Investments Commission (ASIC), “Responsible Lending Guidelines,” 2024 update. https://asic.gov.au/regulatory-resources/credit/responsible-lending/
2. Australian Taxation Office (ATO), “Rental Properties 2025,” latest guidelines on deductions and negative gearing. https://www.ato.gov.au/individuals-and-families/investments-and-assets/rental-properties
3. Reserve Bank of Australia (RBA), “Statement on Monetary Policy – May 2025,” for current assessment rate buffers. https://www.rba.gov.au/publications/smp/2025/may/
4. Mortgage and Finance Association of Australia (MFAA), “Industry Report 2025: Serviceability Trends.” https://www.mfaa.com.au/industry-reports
5. CoreLogic Australia, “Housing Market Update: Rental Yields and Values, June 2025.” https://www.corelogic.com.au/news-research