When to Stress Test and Protect Your Investment Loan

Strong investors in Fremantle plan for the bad month before they buy the property. The most useful habit you can build is to test your investment loan at a higher rate than you expect to pay, then hold enough cash to cover it.

That approach protects your cash flow and keeps your options open. Fremantle has plenty to draw tenants and buyers, from the Fremantle Markets to Fremantle Prison and the Fishing Boat Harbour. Good locations still need a well-built loan behind them.

How Do Lenders Stress Test an Investment Loan?

Banks and other authorised deposit-taking institutions must assess new borrowers at an interest rate at least 3.0 percentage points above the loan's actual rate. This applies to investment loans as well as home loans, and you can use the same test on yourself.

They also count only part of your expected rent. APRA's guidance says prudent lenders include no more than 80 per cent of expected rent, which allows for gaps between tenants.

As an illustrative example, consider an investor with a $600,000 loan over 30 years on principal and interest. At an example rate of 6.75% p.a., the repayment is about $3,892 a month. Tested at 9.75% p.a., it rises to about $5,155 a month, a difference of roughly $1,263.

This investor decides to keep a cash buffer that could cover that gap for several months, in case rates rise and the property sits vacant at the same time. The outcome is a plan where one bad quarter does not force a sale. The trade-off is that the cash earns less than it might if it were invested elsewhere. You can run your own numbers in our mortgage repayment calculator, and our borrowing capacity guide shows how lenders look at your income and debts.

When Does Interest Only Reduce Risk, and When Does It Add It?

An interest-only loan lowers your repayments during the interest-only period, but it does not reduce what you owe. When the period ends, repayments rise because you must repay the full balance over a shorter remaining term.

As an example, take the same $600,000 loan at the illustrative 6.75% p.a. On interest only, the repayment is about $3,375 a month. If the loan runs 30 years with a 5-year interest-only period, principal and interest then applies over the remaining 25 years. At the same rate, the repayment becomes about $4,145 a month, an increase of about $770.

The investor in this scenario plans for that step-up from day one. They use the lower early repayments to build a cash reserve, and they check the new repayment in advance so it does not arrive as a surprise. Lenders also assess interest-only loans using the repayments that apply after the interest-only period, so the feature does not increase how much you can borrow.

The main trade-off is that your debt stays the same while the period runs. If the property value falls or you need to sell, you have built no equity through repayments. Our interest only loans page explains how the structure can work for investors.

How Do the New Negative Gearing Rules Affect Your Risk?

From the 2027-28 income year, net rental losses on established residential properties bought after 7:30pm AEST on 12 May 2026 can only be deducted against other residential property income, including residential capital gains. Excess losses can be carried forward.

Properties held at that time, including those under contract awaiting settlement, keep full deductibility of losses against other income until sold. Eligible new builds acquired after that date also keep it. The change does not affect whether interest is deductible. It affects how a net rental loss can be used.

For a property investor loan, this means you should not rely on a tax refund to cover a shortfall. If the property is established and bought after that date, your salary may not offset the loss, so your cash flow needs to stand on its own. Tax treatment depends on your circumstances, so speak with your accountant before you decide. Our Fremantle investment loans team can model the cash flow side with you.

Why Does Using Equity Change Your Tax and Your Risk?

Releasing equity from one property can fund a deposit on the next, but only if your lender approves the extra borrowing after assessing your serviceability and applying its own LVR limits. The tax result then depends on what you spend the money on. Interest is deductible based on how the borrowed funds are used, not on the security behind the loan.

If you borrow against an existing property to buy another investment, that portion of interest is generally linked to an income-producing purpose. If you use some of the same funds for a holiday or a car, that part is private and its interest is not deductible. Redraws on a loan are treated as separate borrowings under ATO Taxation Ruling TR 2000/2, so mixing purposes in one account can complicate your records.

The risk is that more borrowing against your existing property increases your total debt and your exposure if values or rents fall. Lenders set their own limits above 80 per cent loan to value ratio (LVR), and borrowing above that generally needs lenders mortgage insurance, which you pay. See our equity release page for how this works in practice, and keep your accountant involved in how you structure it.

What Happens If You Cannot Meet Your Repayments?

If you are struggling, tell your lender early. Under the National Credit Code, a borrower with a regulated credit contract, which can include a residential investment loan held by an individual, can notify the lender of hardship verbally or in writing.

The lender then has 21 days to ask for more information. It must either agree to change the contract or give you a written refusal with contact details for the Australian Financial Complaints Authority. Loans made to a company, or wholly or mainly for business purposes, are generally outside the Code.

A yearly review keeps you ahead of that point. Our loan health check looks at whether your structure, rate type and repayments still suit your plans.

If you want an investment loan built to hold up under pressure, call one of our team or book an appointment at a time that works for you. We will test your numbers at higher rates, check your buffers and build a structure that supports your next step.

Frequently Asked Questions