Investors are often surprised that a property which is close to cash-flow neutral in real life can still reduce borrowing capacity. Lenders generally shade rent to allow for vacancies and costs, then assess the property debt using their own serviceability methodology. The result is a conservative view of the investment.
- Rent is usually shaded
- Evidence requirements vary
- Existing investment loans are stress-tested
- Portfolio effects compound
- Model real expenses separately from lender servicing
Why rental income is shaded
Lenders do not assume a property will be occupied every week with no expenses. A percentage of gross rent is commonly used rather than 100%, although the exact percentage and treatment vary.
Some lenders also use different evidence depending on whether the property is existing, newly purchased, short-stay or not yet tenanted.
Existing loan repayments are stressed
An interest-only investment loan can be assessed as if principal-and-interest repayments apply at a higher assessment rate. That can create a significant servicing commitment compared with the actual payment.
Across several properties, these differences compound.
Real cash flow still matters to you
Even if the lender’s servicing model says the loan fits, the investor should model rates, management, strata, maintenance, insurance, land tax where relevant and vacancy.
Bank serviceability is a credit test. It is not a substitute for your own investment cash-flow plan.
Frequently asked questions
Will a lender use the full weekly rent?
Usually not. Most lenders apply a percentage or other policy treatment.
Can proposed rent be used before settlement?
Often yes using a rental appraisal, subject to lender policy.
Does negative gearing increase borrowing capacity?
Some lenders may recognise defined tax benefits in servicing, while others are more conservative. Treatment varies.