Do You Know What Lenders Actually Want From Apartment Investors?

Buying an investment apartment is not the same as buying a house in the eyes of a lender.

The loan application looks similar on the surface, but lenders apply different serviceability tests, different loan-to-value caps, and often different interest rates when the security is a strata unit. If you're a Castle Hill resident looking at apartments closer to the city or in growth corridors like Rouse Hill, you need to know what those differences mean for your borrowing power before you start searching.

Why Lenders Treat Apartments Differently

Lenders price for resale risk. An apartment in a large complex, particularly one with high investor density or shared defect risk, is considered harder to offload quickly if you default. That perceived risk translates into tighter lending policy. Most major banks cap loans on apartments at 90 per cent loan-to-value ratio, and some apply internal postcode or building-specific overlays that reduce the cap further. If the property is in a building taller than four storeys, has more than 50 per cent non-owner-occupier residents, or sits in certain postcodes flagged for oversupply, you may be capped at 80 per cent LVR regardless of your income.

Consider a buyer from Castle Hill who finds a two-bedroom unit in Parramatta. The property is part of a 200-apartment tower near the transport hub. The buyer earns $110,000 and has saved a 10 per cent deposit plus costs. Three of the four major banks decline to lend at 90 per cent LVR because of internal postcode overlays tied to apartment oversupply in that precinct. The buyer either needs to increase the deposit to 20 per cent or switch to a non-major lender willing to accept the postcode at 90 per cent LVR, which typically means a higher interest rate and a restricted product set.

How Body Corporate Fees Affect Borrowing Power

Body corporate levies reduce your borrowing capacity dollar for dollar. When a lender assesses serviceability, they subtract your monthly expenses from your income, apply the serviceability buffer, and calculate the maximum loan you can service. Body corporate fees are treated as an ongoing liability in the same way as a personal loan repayment or a car lease. On a unit with $2,000 per quarter in levies, that's roughly $667 per month the lender will deduct from your net income before applying the repayment test.

That same deduction does not apply to rates and insurance on a freestanding house because those costs are already factored into the lender's household expense measure. The body corporate line item is additional. In practice, every $100 per month in levies reduces your maximum loan amount by around $20,000 to $25,000, depending on the interest rate and the lender's serviceability model. If you're comparing a house and an apartment at the same purchase price, the apartment with high strata fees may require a larger deposit purely because your borrowing power is lower.

Interest Only Loans and the July 2027 Negative Gearing Changes

Most investors choose interest-only repayments for the first few years to maximise cash flow and keep the loan balance high for tax purposes. That strategy still works, but the rules around negative gearing are changing from 1 July 2027 under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

If you purchase an investment apartment on or after 7:30pm AEST on 12 May 2026, and the property is not a qualifying new build, any net rental loss from that property cannot be offset against your salary or other non-rental income from 1 July 2027 onward. The loss can only be offset against other residential rental income or carried forward to offset future rental income or capital gains. Properties already owned before that cut-off date, or under contract before that time, are grandfathered and can continue to be negatively geared under the old rules.

For Castle Hill buyers purchasing established apartments in precincts like Epping, Ryde, or North Sydney, this means the after-tax cost of holding the property increases if the rent does not cover interest and other expenses. You need to model the cash shortfall on an after-tax basis assuming you cannot claim the loss against your wage income. Investment loan structures that rely heavily on negative gearing to subsidise cash flow become less attractive for established stock purchased after the cut-off.

Eligible new builds retain full negative gearing and a choice between the existing 50 per cent capital gains tax discount or cost base indexation with a 30 per cent minimum tax rate. A new build is defined as a dwelling constructed on previously vacant land, or a development that increases the total number of dwellings on the site. A knock-down rebuild that does not add dwellings does not qualify, and neither does a substantial renovation. If a new build is occupied for more than 12 months before it is sold to you, it loses the new build status for tax purposes.

What Rental Income Actually Counts Toward Serviceability

Lenders do not take the advertised rent at face value. Most will assess rental income at 80 per cent of the market rent to account for vacancy, arrears, and management costs. If the property is listed at $650 per week, the lender will include $520 per week in your income assessment. Some lenders apply a flat 75 per cent shading, and a handful will accept 100 per cent if you provide a signed lease and evidence the tenant has paid a bond.

If you already own an investment property and are buying a second apartment, the rental income from your existing property is also shaded. That shading can make it harder to demonstrate serviceability for the second loan, particularly if the first property is negatively geared and the loss is adding to your monthly expense load. The new debt-to-income cap introduced in February 2026 adds another layer. Lenders can now only approve up to 20 per cent of new investor loans at a debt-to-income ratio of six times or more. If your total borrowings across all investment and owner-occupied loans exceed six times your gross income, you may be declined even if you pass the monthly repayment test, unless the lender has capacity left under the 20 per cent quota.

Loan-to-Value Limits and Lenders Mortgage Insurance

If you borrow more than 80 per cent of the property value, you will pay Lenders Mortgage Insurance. LMI is a one-off premium that protects the lender if you default and the property sells for less than the outstanding loan. The premium is calculated as a percentage of the loan amount and typically ranges from 1.5 per cent to 4 per cent depending on the LVR and the insurer's risk assessment of the property.

LMI on investment loans is higher than on owner-occupied loans at the same LVR. It is also capitalised into the loan, which means you pay interest on the premium for the life of the loan unless you refinance and remove it. On a $500,000 loan at 90 per cent LVR, the LMI premium might be $15,000 to $20,000. That cost is not deductible for tax purposes in the year it is incurred, but it can be amortised over five years or the term of the loan, depending on how the ATO applies the borrowing expense rules to your circumstances. You should confirm the treatment with a registered tax agent.

Some postcodes and building types attract higher LMI premiums or are excluded from LMI coverage altogether. Buildings with known defects, unresolved remediation claims, or a high percentage of short-term rental use may be uninsurable at any LVR above 80 per cent. If that happens, you will need a 20 per cent deposit regardless of your income.

Variable Rate Versus Fixed Rate for Investment Apartments

Most investors choose variable rates because they want the flexibility to make extra repayments, offset rental income, or refinance without penalty. A variable rate loan lets you link an offset account to the loan so that surplus rental income or personal savings sit in the offset and reduce the interest charged each month. The interest saving is not counted as income for tax purposes, but the reduction in your loan cost is equivalent to earning interest at the loan rate, tax-free.

Fixed rates lock in your repayment for a set term, usually one to five years, but they come with restrictions. You cannot make extra repayments beyond a small annual allowance, you cannot link an offset account, and if you sell or refinance during the fixed period you will pay break costs. Break costs are calculated based on the wholesale funding loss the lender incurs when you exit early, and they can run to tens of thousands of dollars if rates have fallen since you fixed.

For investment purposes, the lack of an offset is the bigger issue. Rental income that cannot be offset ends up in a savings account where it is taxed at your marginal rate. That erodes the after-tax return. A split loan, part variable with offset and part fixed, gives you rate certainty on a portion of the debt while keeping flexibility on the rest.

How Castle Hill Buyers Can Use Equity to Fund an Apartment Deposit

If you own a home in Castle Hill and have built up equity, you can use that equity as security for the deposit on an investment apartment without selling your existing property. The lender takes a mortgage over both your home and the new apartment, and lends up to 80 per cent of the combined value across both properties.

In a scenario like this, a borrower owns a house in Castle Hill valued at $1.3 million with a $600,000 mortgage. The usable equity is 80 per cent of $1.3 million, which is $1.04 million, minus the existing $600,000 debt. That leaves $440,000 in accessible equity. The borrower wants to purchase a two-bedroom apartment in Rouse Hill for $700,000. The lender will lend up to 80 per cent of $700,000, which is $560,000, using $140,000 of the equity from the Castle Hill property to cover the shortfall. The borrower does not need to provide cash for the deposit, but the total debt across both properties is now $1.16 million secured against $2 million in property value, which sits comfortably within the 80 per cent LVR policy.

This approach works only if your income can service both loans. The lender will assess the new apartment loan and the existing home loan together, apply the serviceability buffer to both, and add the rental income from the apartment at 80 per cent shading. If the combined repayments exceed your capacity, the application will be declined regardless of how much equity you have. You can explore whether this structure suits your situation with a mortgage broker in Castle Hill who can model the numbers before you make an offer.

Tax Deductions You Can Claim on an Investment Apartment

Interest on the loan, body corporate fees, council and water rates, landlord insurance, property management fees, and depreciation on the building and fixtures are all deductible. Loan establishment fees and LMI premiums are also deductible, but they must be spread over five years or the loan term rather than claimed in full in the first year.

Depreciation is often the largest non-cash deduction. The building itself can be depreciated at 2.5 per cent per year if it was built after 1987, and fixtures like carpets, blinds, hot water systems, and air conditioning can be depreciated at higher rates under the diminishing value method. A quantity surveyor prepares a depreciation schedule that sets out the claimable amounts each year. The cost of the schedule, usually $600 to $900, is itself deductible in the year it is incurred.

From 1 July 2027, if your apartment was purchased on or after 12 May 2026 and is not a qualifying new build, your net rental loss can only be offset against other residential rental income or carried forward. It cannot reduce your taxable salary. If you have multiple investment properties, losses from one can offset income from another, but the quarantine applies to the net position across all non-exempt residential properties purchased after the cut-off.

Under the capital gains tax changes, gains accruing from 1 July 2027 onward on affected properties will no longer receive the 50 per cent discount. Instead, your cost base will be indexed for inflation and the real gain will be taxed at a minimum 30 per cent rate. Gains that accrued before 1 July 2027 remain under the old rules. For new builds, you can elect to stay on the 50 per cent discount or switch to indexation with the 30 per cent floor, whichever gives the lower tax.

If you're weighing up whether an apartment purchase still makes financial sense under the new rules, run the numbers with and without negative gearing, model the after-tax cash flow, and factor in the CGT treatment on exit. The answer will depend on your marginal tax rate, your other sources of income, and how long you plan to hold the property. A loan health check and a conversation with a tax adviser will give you the clarity you need before you sign anything.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions