How do banks calculate my borrowing capacity for an investment loan?

No lender publishes its exact formula, and there isn’t one single number that applies across the market — but the underlying method is the same everywhere, because it’s built on the same responsible-lending law and prudential rules. A bank adds up your assessable income (discounting some types of it), subtracts your assessed living expenses and every debt repayment you carry (each tested at a buffered, higher-than-actual interest rate), and what’s left over is roughly what it’s prepared to lend against a new investment property — subject to the property’s value, the loan-to-value ratio, and that lender’s own credit policy on top. The building blocks are set by regulation. The exact settings inside them — how big a discount, which expense benchmark, where the cut-off sits — are commercial decisions each lender makes for itself, which is why the same application can produce different answers at different banks.

Residential investment loans sit inside this framework on the same footing as an owner-occupier home loan, not a separate, lighter-touch one. The National Credit Code captures investment borrowing through its own limb of the law, and ASIC’s Regulatory Guide 209 requires the lender to make reasonable inquiries into your income and expenses, take reasonable steps to verify what you tell them, and assess whether you could meet the repayments without substantial hardship — for an investment loan exactly as for a home loan.

How is rental income from the property treated?

Not counted in full. Prudential guidance from APRA describes prudent bank practice as applying a minimum haircut of around 20% to the rental income you’re expecting from the property, with a larger discount again where the property carries a higher risk of sitting vacant. The same guidance also notes that banks would normally place less weight on a third party’s estimate of what a property might rent for than on actual rental receipts — so a property you already own and lease out, with a real rental history, tends to carry more weight in the assessment than a projected rent on one you haven’t bought yet.

That discount isn’t unique to rental income. The same regulator guidance describes prudent practice as discounting most non-salary income by at least 20% too — bonuses, overtime, variable commissions, and other investment income all get the same treatment, not just the rent from an investment property.

Why do lenders add an interest-rate buffer, and how big is it?

On top of the income discounting, your serviceability is tested at the loan’s actual interest rate plus a buffer — not the rate you’d actually pay. Attachment C of Prudential Standard APS 220 requires banks to add a buffer of at least 3 percentage points to a loan’s interest rate when testing whether you can service it, unless APRA has determined otherwise. That buffer applies to the new loan you’re applying for and to every debt commitment you already have, including your own home loan if you’re a homeowner. The point of it is to check you could keep meeting repayments if rates rose from where they are now — it isn’t a prediction that they will.

For context, not a forecast: the Reserve Bank held the cash rate at 4.35% at its meeting in June 2026 (as at July 2026). The RBA’s own lending statistics for May 2026 show investors paying, on average, around 0.2 percentage points more than owner-occupiers on new loans across the banking system — a system-wide average across all lenders, not a quote from any specific bank, and not an indication of where rates are headed next. Whatever your own rate ends up being, the buffer sits on top of it, not instead of it.

How do living expenses and other debts reduce the number?

A lender also has to make reasonable inquiries into your living expenses, and typically assesses you at the higher of two figures: what you actually declare, or a benchmark figure — most commonly the Household Expenditure Measure (HEM), published quarterly by the Melbourne Institute at the University of Melbourne. ASIC’s own guidance is blunt about what a benchmark like HEM is for: in the regulator’s words, it’s “a notional figure in substitution for making reasonable inquiries” — a plausibility check on what you’ve told the lender, not proof of your actual spending, and a lender isn’t required to treat it as a floor where your genuinely verified expenses are lower.

Every other debt you’re carrying gets folded into the same assessment: credit cards, personal loans, buy now pay later and any HELP/HECS balance (responsible-lending guidance was specifically updated in March 2025 to address how HELP debts are taken into account). None of it is tested at today’s minimum repayment — the same buffered-rate approach used for the new loan applies to your existing debts too.

Does interest-only repayment change how the loan is assessed?

Structuring the new loan as interest-only doesn’t loosen the test. Prudent serviceability assessment is based on your ability to repay principal and interest over the loan’s real remaining term, not just the lower interest-only repayment you’d actually be making for the first few years. APRA doesn’t currently cap the volume of interest-only lending by number — it did between 2017 and 2019, as a temporary supervisory benchmark limiting new interest-only lending to 30% of new residential mortgage lending system-wide, but that benchmark was removed (in a phased way, bank by bank) once industry-wide interest-only lending had fallen well under the mark. As at July 2026, there’s no reinstated numeric cap; current guidance instead expects each bank to hold its own portfolio limits and keep interest-only periods of limited duration.

Does a possible negative gearing tax benefit increase how much I can borrow?

No. Prudent lending practice explicitly places no reliance on a borrower’s potential ability to access a future tax benefit from running a rental property at a loss when working out serviceability — a bank assesses what the property and loan cost you before tax, not what you might get back afterwards.

Negative gearing describes what happens when a rental property’s deductible expenses — including loan interest — exceed the rental income it earns, producing a net rental loss. Under current tax law (as at July 2026), the ATO’s guidance describes that loss as one you can generally deduct against your other income, such as salary, in the same tax return, carrying forward any amount your other income can’t absorb; there’s no general dollar cap on this under current law. Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.

That current-law treatment has a use-by date worth knowing about now, even though it doesn’t affect what a bank counts as income today. Since royal assent on 26 June 2026, an enacted reform will, from the 2027-28 income year, quarantine future net rental losses on residential property so they can no longer be deducted against your other income — usable instead only against residential rental income or gains, or carried forward. Interests acquired under a contract entered into before 7:30pm AEST on 12 May 2026 are grandfathered under the current rules. Our guide to cash flow positive vs negatively geared property covers both the current-law and 2027-28 positions side by side.

What changes the number, at a glance

Factor	How it generally affects the assessment	Where it comes from
Rental income	Discounted at least ~20%; more for vacancy risk	APRA prudential guidance (APG 223)
Other non-salary income	Also discounted at least ~20%	APRA prudential guidance (APG 223)
Interest-rate buffer	At least 3 points added to the rate	APRA Prudential Standard APS 220
Living expenses	Higher of declared figure or HEM benchmark	ASIC RG 209
Existing debts	Cards, loans, BNPL and HELP/HECS all counted	ASIC RG 209
Repayment type	Tested on real P&I term, not IO period	APRA prudential guidance (APG 223)
Potential tax benefit	Not counted as usable income	APRA prudential guidance (APG 223)
Exact settings above the floor	Set individually by each lender	Varies by lender

Full detail and sourcing for each row sits in the sections above.

Is there a way into property investing that skips this calculation altogether?

Everything above applies once you’re borrowing to buy a whole property. It doesn’t apply if you’re not borrowing at all. Fractional property investing lets you buy a direct economic interest in a specific residential property without taking out a home loan yourself — on MyBrix, retail investors can start from as little as $100 a month through NestEgg, with contributions building up until they buy a whole Brix, as at July 2026.

None of the borrowing-capacity mechanics above come into that purchase, because there’s no loan application behind it. It’s a different kind of asset from owning a property outright, with its own risks, costs and liquidity considerations — not a substitute for understanding how property finance works if a mortgage is still part of your plan.

Where do I get an actual number for my situation?

The framework above explains the machinery; only a lender or a broker can tell you the figure it produces for your own income, expenses and debts. A mortgage broker can put your numbers in front of several lenders at once and show you how differently each one’s own settings — the exact rental-income discount, the buffer above the regulatory floor, the expense benchmark used — land on your result, since none of that is set centrally across the market. Many banks and brokers also publish an online borrowing-power calculator; treat whatever figure it returns as a starting estimate built on that calculator’s own assumptions, not a guaranteed outcome, and confirm it against a real conversation before you rely on it.

Our guide to property investment in Australia covers how the wider mechanics, costs and risks of investing in residential property fit together — borrowing capacity is one piece of that picture, not the whole of it.