The Pros and Cons of Building a Property Portfolio

Building a Property Portfolio in Mount Lawley's Inner-City Market

Growing a property portfolio means borrowing against properties you already own to fund the next purchase. Each property you add changes how lenders assess your borrowing capacity, particularly when rental income from existing holdings forms part of your application. Mount Lawley's proximity to the CBD and established rental demand make it a natural starting point for local investors, but serviceability becomes tighter with each property added.

Lenders now assess new investment loan applications at a rate 3.0 percentage points above the actual product rate. If you're quoted a variable rate around 6.2 per cent, the bank calculates your repayment capacity at 9.2 per cent. That buffer has been in place since late 2021 and applies to every new loan, whether it's your first investment property or your fifth. Rental income is also shaded, with most lenders applying a discount of 20 per cent to account for vacancy periods and maintenance costs, meaning only 80 per cent of the expected rent is counted toward your income.

Consider an investor who owns a unit in Mount Lawley valued around the suburb's typical unit price and wants to purchase a second property in a neighbouring suburb. The existing unit generates rental income, but after the lender applies the 20 per cent discount and deducts the current loan repayment, the net contribution to serviceability may be modest. If that investor also carries personal debt or has dependents, the second purchase may require additional income or a larger deposit to satisfy the lender's calculations. The outcome depends on the specific numbers, but the principle holds: each property in a portfolio must stand on its own serviceability footing.

Debt-to-Income Limits and Multi-Property Borrowing

From February this year, lenders can allocate no more than 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or higher. The limit applies separately to each lender's investor loan book and is measured quarterly. If your total borrowing across all properties and other debts reaches six times your gross annual income, you fall within that restricted 20 per cent allocation.

For a household earning $150,000 per year, the six-times threshold sits at $900,000 in total debt. If you already hold two investment properties with a combined loan balance of $750,000 and want to borrow another $250,000 for a third property, your total debt would be $1,000,000, placing you above the threshold. That doesn't mean the application is automatically declined, but it does mean the lender must fit your loan within their quarterly cap. In practice, borrowers above the ratio may face longer approval times, stricter conditions, or a requirement to approach a lender with remaining capacity under the limit. Some investors now refinance existing loans to release equity or consolidate debt before applying for the next property, though refinancing itself is subject to the same serviceability rules.

Interest-Only Loans and Cashflow Management

Interest-only repayments are structured so you pay only the interest portion of the loan for a set period, typically five years, without reducing the principal. The monthly repayment is lower than a principal-and-interest loan of the same amount, which can improve cashflow during the holding period. For investors building a portfolio, that cashflow buffer can be important when managing multiple properties or planning the next purchase.

Using the same investor with two properties: if both loans are interest-only, the combined monthly repayment is lower than it would be under principal-and-interest terms. That leaves more income available to service a third loan application or cover holding costs during a vacancy. Once the interest-only period expires, the loan typically converts to principal-and-interest unless you apply to extend the interest-only term. Lenders assess any extension request based on your circumstances at the time, and some lenders restrict repeat extensions, particularly for loans with a high loan-to-value ratio.

Interest-only loans are also assessed differently under the prudential framework. If the interest-only period exceeds five years or is unspecified, and the LVR is above 80 per cent, the loan is classified as non-standard and attracts a higher capital weighting for the lender. That cost is sometimes passed to the borrower through a higher interest rate or more conservative LVR cap. Most investment loan products offer a maximum five-year interest-only term to avoid that classification.

How Lenders Value Rental Income Across a Portfolio

Rental income from investment properties is treated as part of your total income when you apply for a new investment loan, but lenders discount it to account for periods when the property may be vacant or require repairs. The standard discount is 20 per cent, though some lenders apply higher rates depending on the property type or location. That means a property renting for $600 per week contributes $480 per week to your serviceability calculation, or roughly $25,000 per year.

If you hold three properties each generating $600 per week in rent, the combined gross rental income is $1,800 per week. After the 20 per cent discount, lenders treat it as $1,440 per week, or approximately $75,000 per year. From that figure, the lender deducts the loan repayments on each property, calculated at the assessment rate, plus any strata fees, council rates, and other holding costs. What remains is the net rental contribution, which is added to your employment or business income to determine how much additional borrowing you can service. The calculation is cumulative, so the more properties you hold, the more important it becomes to keep vacancy rates low and rents at market levels.

Using Equity to Fund Deposit and Costs

Equity is the difference between what your property is worth and what you owe on it. As property values rise or your loan balance falls, your equity increases. Lenders allow you to borrow against that equity, up to a certain LVR, to fund the deposit and costs for your next purchase. The equity release is structured as a separate loan or a top-up of your existing loan, and the combined borrowing is assessed under the same serviceability and LVR rules.

In a scenario where your Mount Lawley property is valued at $850,000 and you owe $500,000, your equity is $350,000. If the lender permits borrowing up to 80 per cent LVR without Lenders Mortgage Insurance, you can access $680,000 in total debt against that property, leaving $180,000 in usable equity. That amount could cover a 20 per cent deposit on a $700,000 property plus settlement costs, though you would still need to meet the serviceability requirements for both the increased loan on the first property and the new loan on the second. Releasing equity does not require you to sell the property, but it does increase your total debt and your monthly repayments, which are both factored into the next loan application.

Tax Treatment and Holding Costs

Interest on borrowings used to purchase or hold rental property is deductible against your assessable income, along with other holding costs such as council rates, insurance, property management fees, repairs, and depreciation. Where those deductions exceed the rental income, the property is negatively geared, and the loss can be offset against other income, including salary, for properties held before mid-May this year or for eligible new builds purchased after that date. For established properties acquired after mid-May, losses can only be offset against other residential property income from the 2027-28 income year onward, though existing properties remain unaffected.

For investors holding multiple properties, the total deductions can be substantial, particularly in the early years when loan balances and interest costs are high. A portfolio of three properties each generating a modest loss might reduce your taxable income by $30,000 to $40,000 per year, depending on interest rates and holding costs. That reduction lowers your tax liability, though it also reduces your after-tax income, which is one of the figures lenders consider when assessing your capacity to service further borrowing. The tax benefit is real, but it doesn't increase your borrowing capacity.

When Portfolio Growth Meets Serviceability Limits

Reaching your borrowing capacity doesn't always mean you've run out of equity or deposit funds. In many cases, the constraint is income. Once your existing loan commitments, assessed at the higher buffer rate, consume most of your income after living expenses, lenders won't approve additional borrowing even if you have equity available. That point arrives sooner for investors with interest-only loans converting to principal-and-interest, or for those holding properties in areas with lower rental yields.

Some investors address this by increasing their income through a higher salary, a second job, or bringing in a co-borrower. Others consolidate their portfolio by selling one property to reduce debt, then using the released equity and improved serviceability to purchase two or more properties in different locations or price brackets. A smaller number switch from residential investment to commercial property, where rental income is often treated more favourably by lenders and loans are assessed under different criteria. Each approach depends on the investor's long-term strategy, but the common thread is recognising when serviceability, rather than deposit, has become the limiting factor.

Call one of our team or book an appointment at a time that works for you. We'll review your current portfolio, run the serviceability numbers, and show you what your next purchase looks like under today's lending rules.

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