Beginner's Guide to Investment Market Research

Legislative Framework Governing Investment Loan Assessment

Residential investment loan applications submitted to authorised deposit-taking institutions are subject to specific prudential requirements imposed by the Australian Prudential Regulation Authority under the Banking Act 1959 (Cth). All lenders regulated by APRA must assess each applicant's capacity to service the proposed loan at an interest rate not less than 3.0 percentage points above the actual product rate offered. This serviceability buffer, confirmed at 3.0 percentage points in the 28 May 2026 APRA macroprudential policy announcement, applies irrespective of the applicant's income level, existing property holdings or proposed deposit amount.

A debt-to-income limit became operative on 1 February 2026 pursuant to Prudential Standard APS 220, Attachment C. Each authorised deposit-taking institution may advance, measured quarterly, up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. The calculation includes all debts secured against residential property, consumer credit facilities and other obligations disclosed during the application process. Bridging loans and loans for the purchase or construction of new dwellings are excluded from the calculation. Non-authorised deposit-taking institution lenders are not presently subject to this constraint, though APRA retains powers under Part IIB of the Banking Act 1959 (Cth) to extend macroprudential tools where necessary to preserve financial system stability.

Consider an applicant with a household income of $180,000 and existing obligations totalling $950,000. The proposed investment loan amount of $630,000 would bring total debt to $1,580,000, representing a debt-to-income ratio of 8.78 times. Under the operative limit, that application would fall within the restricted 20 per cent allocation and may be declined or subject to additional pricing adjustments depending on the lender's quarterly position and internal credit policy.

Risk Weighting and Capital Allocation Under Prudential Standard APS 112

Prudential Standard APS 112, Capital Adequacy: Standardised Approach to Credit Risk, prescribes specific risk weights that apply to residential mortgage exposures based on occupancy status, repayment structure and loan-to-valuation ratio. Investment loans and interest-only loans attract higher risk weights than owner-occupied principal-and-interest loans at equivalent loan-to-valuation ratios. The standard, currently in force from 1 July 2025, defines the criteria for classification of a residential mortgage as a standard loan, including the requirement for a registered first mortgage with unequivocal enforcement rights, a positive serviceability assessment and compliance with specified loan-to-valuation thresholds.

Where multiple loans are secured over the same property in sequential ranking order with no intermediate interest from another lender, the loan amounts are aggregated and treated as a single exposure for the purpose of calculating the loan-to-valuation ratio. Offset account balances do not reduce the loan amount for loan-to-valuation purposes under APS 112. A long-term interest-only residential loan is classified as non-standard where the loan-to-valuation ratio exceeds 80 per cent and the contractual interest-only period exceeds five years or is not specified.

An authorised deposit-taking institution may reduce its credit risk capital requirement where the exposure is covered by eligible lenders mortgage insurance. To qualify, the insurance must provide cover for all losses up to at least 40 per cent of the higher of the original loan amount and the outstanding loan amount, and must be provided by a lenders mortgage insurer regulated by APRA. Lenders mortgage insurance is generally required on residential loans where the loan-to-valuation ratio exceeds 80 per cent. The premium is calculated on a sliding scale based on the loan amount and loan-to-valuation ratio and is a cost borne by the borrower. State and territory stamp duty may be payable on the lenders mortgage insurance premium in some jurisdictions.

Deductibility of Borrowing Costs and Negative Gearing Restrictions

Under the Income Tax Assessment Act 1997 (Cth), interest on borrowings used to acquire or hold residential rental property is deductible against assessable income to the extent the property is rented or held to produce assessable income. Interest on borrowings for private purposes is not deductible regardless of the security provided. Other ongoing holding costs, such as council rates, insurance, property management fees, repairs and depreciation, are deductible for the period the property is rented or genuinely available for rent.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (No. 49, 2026), which received royal assent on 26 June 2026, introduced restrictions on the deductibility of losses from established residential investment properties acquired after 7:30pm AEST on 12 May 2026. From the 2027-28 income year, losses related to such properties are deductible only against other income from residential properties, including capital gains on residential properties. Excess losses can be carried forward to offset residential property income in future years. Properties acquired between 7:30pm AEST on 12 May 2026 and 30 June 2027 may be negatively geared under the prior rules until 30 June 2027 only.

Properties held at 7:30pm AEST on 12 May 2026, including properties under contract awaiting settlement at that time, continue to be fully deductible against other income, including salary and wages, until the property is sold. Eligible new builds acquired after 12 May 2026 also continue to attract full deductibility. Eligible new builds include dwellings constructed on previously vacant land and dwellings replacing existing properties where the number of dwellings increases. Knock-down rebuilds that do not increase dwelling numbers, and substantial renovations, are not eligible. A new build occupied for more than 12 months before sale to a subsequent investor loses access to negative gearing for that subsequent purchaser.

In the Australian Capital Territory, vacant residential land parcels in developing areas such as Whitlam, Coombs and Denman Prospect may qualify as eligible new build sites, provided construction commences within the requisite timeframe and dwelling numbers increase. Urban infill sites within established suburbs such as Braddon, Kingston and Turner may also qualify where a single dwelling is replaced by a dual occupancy or townhouse development, subject to verification of the construction commencement date and compliance with Territory planning approvals.

Capital Gains Tax Treatment From 1 July 2027

The 50 per cent capital gains tax discount continues to apply to capital gains accruing on all residential property, including investment properties, up until 1 July 2027, for individuals, trusts and partnerships who have held the asset for more than 12 months. From 1 July 2027, the 50 per cent capital gains tax discount for individuals, trusts and partnerships on affected assets is replaced by cost base indexation using the Consumer Price Index and a 30 per cent minimum tax rate on real capital gains accruing from that date. Investors index the cost base of their assets in line with inflation and pay tax on above-inflation profits only.

For assets owned before 1 July 2027 and sold after that date, gains are taxed under the current rules for the portion accruing before 1 July 2027 and under the new rules for the portion accruing after that date. Taxpayers may either obtain a market valuation as at 1 July 2027 or apply an ATO-published apportionment formula. For investors in eligible new build residential properties, both the existing 50 per cent capital gains tax discount and the new indexation and 30 per cent minimum tax arrangements are available as a choice at the time of disposal. The operative provisions are in Schedule 1 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which amends the Income Tax Assessment Act 1997 (Cth) primarily in new Subdivision 112-E. The 30 per cent minimum rate is imposed by the Income Tax Rates Amendment (Tax Reform No. 1) Act 2026 (No. 50, 2026).

The minimum rate applies only to the post-1 July 2027 indexed portion of a gain and only where the taxpayer's effective rate on that portion is below 30 per cent. Recipients of certain government payments, including the Age Pension, Disability Support Pension, parental leave pay and JobSeeker, are exempt from the minimum rate in any financial year they receive such a payment. This exemption may be relevant for applicants intending to hold investment properties into retirement or in circumstances where employment income ceases.

Foreign Investment Restrictions on Established Residential Dwellings

Under the Foreign Acquisitions and Takeovers Act 1975 (Cth), foreign persons, including temporary residents and foreign-owned companies, are generally prohibited from purchasing established dwellings in Australia from 1 April 2025 to 30 June 2029. The prohibition was originally set to end on 31 March 2027 and was extended by 2 years and 3 months as part of the 2026-27 Budget. Limited exceptions apply, including investments that significantly increase housing supply, investments that support the availability of housing supply on a commercial scale, purchases by foreign companies that employ workers under the Pacific Australia Labour Mobility scheme, and certain Build to Rent developments. Purchases by permanent residents and New Zealand citizens remain permanently exempt. Temporary residents can still apply for Foreign Investment Review Board approval to purchase new dwellings or vacant land. Application fees for established dwelling exceptions were tripled from 1 April 2025.

Foreign investors who acquire vacant residential land are generally subject to a condition that construction be completed within 4 years and that the land not be sold until construction is complete, as set out in Treasury Guidance Note 6 (Residential Land). The Australian Taxation Office and Treasury received additional funding in the 2025-26 and 2026-27 Budgets to enforce development conditions and target land banking. Foreign owners of residential property who do not occupy or make the property available for rent for at least 183 days in a vacancy year are liable to pay an annual vacancy fee. For vacancy years starting on or after 9 April 2024, the vacancy fee is double the foreign investment application fee that applied to the property purchase.

Canberra's appeal to international students and temporary skilled workers, particularly those employed in the public service, defence sector and higher education institutions, has historically supported demand for investment properties in proximity to the Australian National University, University of Canberra and Russell offices. The foreign investment restrictions reduce the pool of potential purchasers for established dwellings in suburbs such as Acton, Bruce, Belconnen and Barton, which may affect resale liquidity and capital growth assumptions for properties acquired under investment loan structures.

Application Process and Documentation Requirements

An investment loan application to an authorised deposit-taking institution requires submission of evidence demonstrating income, existing liabilities, employment status, deposit source and the proposed security property. Income verification generally requires two years of tax returns and notices of assessment for self-employed applicants, or recent payslips and employment contracts for salary and wage earners. Where rental income from the proposed investment property is to be included in the serviceability assessment, lenders typically apply a discount factor, commonly 80 per cent of the gross rental income, to account for vacancy periods and maintenance costs.

The deposit must be demonstrated as genuine savings or equity released from an existing property. Gifted deposits are accepted by some lenders subject to a signed declaration from the donor confirming the funds are not repayable. Equity release requires a valuation of the existing security property and confirmation that the combined loan-to-valuation ratio across all secured debts remains within the lender's credit policy. Where the combined loan-to-valuation ratio exceeds 80 per cent, lenders mortgage insurance is generally required, with the premium payable by the borrower.

Lenders also require evidence of the rental income achievable on the proposed investment property. This may be satisfied by a rental appraisal from a licensed property manager in the relevant locality or, where the property is already tenanted, a copy of the executed lease agreement. For properties in the Australian Capital Territory, rental vacancy rates differ materially between suburbs and dwelling types. Units in oversupplied precincts such as Gungahlin town centre and Belconnen town centre have experienced higher vacancy periods in recent years, which may result in lenders applying a lower income treatment or requiring a larger deposit to offset perceived risk.

Hardship Provisions and Borrower Protections

Under section 72 of the National Credit Code, which is Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth), a borrower under a regulated credit contract, including a regulated residential investment loan held by a natural person or strata corporation, may give the credit provider notice, verbally or in writing, of their inability to meet their obligations under the credit contract. Following receipt of a hardship notice, the credit provider has 21 days to request further information from the borrower. Where information is requested, the credit provider must respond to the hardship notice within 21 days of receiving the requested information. If the borrower does not provide the requested information within 21 days, the credit provider must respond within 28 days from the date of the information request. The response must either agree to change the contract or notify the borrower in writing of the refusal and provide contact details for the Australian Financial Complaints Authority.

Credit provided to a company or wholly or predominantly for business purposes is generally outside the National Credit Code. Investment loans secured by residential property and used to generate rental income are typically within scope of the National Credit Code where the borrower is a natural person, even though the loan purpose is investment rather than personal consumption. Applicants considering the acquisition of multiple investment properties through a corporate structure or discretionary trust should seek advice from a licensed tax adviser regarding the implications for both hardship protections and deductibility of interest and other holding costs.

OAUM Securities maintains access to investment loan products from authorised deposit-taking institutions and non-authorised deposit-taking institution lenders across Australia. Our personnel are familiar with the application of Prudential Standard APS 220, debt-to-income limits, risk weighting under Prudential Standard APS 112, and the documentation requirements imposed by individual lenders. We also monitor legislative developments, including proposed amendments to the foreign resident capital gains tax regime currently before parliament, and provide referrals to licensed tax advisers and conveyancers where required. Call one of our team or book an appointment at a time that works for you.

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