Why Principals Should Rethink Property Investment Now

The rules around property investment shifted substantially in the past 18 months, and principals now face a different investment landscape than the one you may have researched a few years ago.

Federal tax reforms that take effect from July 2027 have changed what negative gearing means for most investors, APRA introduced debt-to-income caps earlier this year, and the foreign investment ban on established properties continues through to mid-2029. If you have been considering adding a rental property to your portfolio or expanding an existing one, understanding how these changes interact with your income level and borrowing position matters more than general property advice written before the reforms passed.

What Changed for Investors in the Past Year

From July 2027, rental losses on most residential properties purchased after May 2026 can only be offset against other rental income or carried forward, not against your salary. Properties you already own remain under the old rules, and newly constructed dwellings that increase the housing stock still allow full negative gearing. The capital gains tax discount also shifts to an indexation model with a 30 per cent minimum rate on real gains for most properties, though new builds let you choose between the old discount and the new approach.

As a principal, your income puts you in a position where negative gearing historically delivered a meaningful tax benefit. That benefit now depends entirely on what type of property you purchase and when. A principal earning around $160,000 who buys an established apartment will quarantine any rental loss from July 2027, while the same principal buying a newly constructed townhouse on vacant land retains the ability to offset that loss against salary.

How Debt-to-Income Caps Affect School Leaders

APRA's debt-to-income cap, in place since February, limits how much lenders will approve relative to your gross income. Lenders can now fund only 20 per cent of their new investor loans at a debt-to-income ratio of six times or higher, and they apply that cap separately to investor and owner-occupier lending.

If you earn $160,000 and already hold an owner-occupied loan of $600,000, adding an investment loan of $400,000 would push your total debt to six times your income. Many lenders will still write that loan, but some now decline or require a larger deposit to keep the ratio under six. The cap does not prevent lending above six times income outright, but it makes approval less certain and narrows your options. Construction finance for new dwellings sits outside the cap, which creates another advantage for principals looking at newly built property.

Why New Builds Now Carry More Weight

A newly constructed dwelling purchased from July 2027 onward allows you to offset rental losses against your teaching income, claim the existing CGT treatment if you prefer it, and sit outside the debt-to-income cap if financed as construction. An established property purchased after May 2026 does not offer any of those features.

Consider a principal buying a new townhouse in a growth corridor for $620,000 with a 10 per cent deposit. Rental income covers most but not all of the mortgage, rates, insurance, and management fees, leaving a $4,000 annual shortfall. That loss reduces taxable income by $4,000 each year, saving roughly $1,800 in tax at the marginal rate. The same principal buying an established unit in the same area for the same price with the same rental shortfall would need to carry forward that $4,000 loss until the property is sold or produces a gain, delivering no immediate tax relief.

The definition of a new build under the reforms includes dwellings constructed on previously vacant land and developments that increase the dwelling count, such as a duplex replacing a single house. It does not include knock-down rebuilds that result in the same number of dwellings or renovations. A subsequent investor loses access to the new build benefits if the property was occupied for more than 12 months before they purchased it, so buying a display home or recently completed spec build still qualifies, but buying a property that has been tenanted for two years does not.

What This Means for Borrowing Capacity

Lenders assess investment loan applications using a serviceability buffer set at three percentage points above the loan's interest rate, and they calculate the net rental income after allowing for vacancy, management fees, and other holding costs. Most lenders assume a vacancy rate between 3 and 5 per cent of gross rent and apply a rental income factor of around 80 per cent, meaning they count only 80 per cent of the stated rent when working out what you can afford.

Your borrowing capacity as a principal depends on your salary, existing debts, dependants, and how the lender treats rental income. A principal with no other mortgage, no dependants, and a stable income can typically borrow between 4.5 and 5.5 times gross income for an investment property, assuming no other significant debts. Adding an existing owner-occupied loan or dependent children reduces that multiple.

Refinancing an existing investment loan before the mid-2027 tax changes take effect does not extend grandfathering to a new property. The grandfathering applies to the property, not the loan. If you own a rental property purchased before May 2026, you retain full negative gearing on that asset regardless of whether you refinance the debt. Buying a second investment property after May 2026 means the new property is subject to quarantining from July 2027, even if you fund it by releasing equity from the grandfathered property.

Interest-Only Versus Principal and Interest

Many investors structure investment loans as interest-only for an initial period, usually between one and five years, to reduce the monthly repayment and increase rental yield or after-tax cash flow. Interest-only terms do not reduce the loan balance, so the principal remains unchanged until the interest-only period ends and the loan reverts to principal and interest.

An interest-only structure makes sense when you expect the property to appreciate, plan to use surplus cash flow to pay down non-deductible debt such as your home loan, or want to maximise the proportion of your repayment that remains tax deductible. It makes less sense if holding costs already stretch your budget, because the reversion to principal and interest increases the repayment substantially and lenders reassess serviceability at that point.

From July 2027, an interest-only loan on an established property purchased after May 2026 will not reduce your taxable income unless you hold other rental properties producing assessable income. The interest remains deductible in the tax return, but the deduction can only offset rental income, not salary. Principals using interest-only terms to manage cash flow while paying down their home loan will find that strategy unchanged for grandfathered properties and less effective for newly purchased established dwellings.

Fixed Versus Variable Rates for Investment Lending

Variable rates on investment loans sit higher than owner-occupier variable rates, typically by 20 to 60 basis points depending on the lender and loan size. Fixed rates are also higher for investors than for owner-occupiers. Lenders apply the higher rate because default rates and loss-given-default figures are higher on investment lending, and APRA's capital framework assigns higher risk weights to investor loans.

Locking in a fixed rate provides certainty over repayments and deductible interest for the fixed term, but it also removes flexibility. Breaking a fixed-rate investment loan early usually incurs a break cost calculated on the difference between your fixed rate and the lender's cost of funds at the time you exit. Most lenders also limit extra repayments during a fixed term or charge a fee if you exceed an annual threshold.

Principals managing multiple debts, including a home loan, often benefit from splitting an investment loan between fixed and variable portions. The fixed portion stabilises part of the repayment and deduction, while the variable portion allows extra repayments if cash flow improves or lets you access redraw if needed. Lenders generally allow splits in any proportion, such as 50/50, 60/40, or 70/30, and you can fix each portion for a different term.

Lenders Mortgage Insurance and Higher Loan-to-Value Lending

Lenders Mortgage Insurance applies when your deposit is less than 20 per cent of the property value, and the premium is higher for investment loans than for owner-occupier loans at the same loan-to-value ratio. A principal borrowing 90 per cent of the purchase price for an investment property will pay an LMI premium of roughly 3 to 4 per cent of the loan amount, depending on the lender and insurer.

Some lenders offer discounted or waived LMI to teachers and principals, though the waiver usually applies only to owner-occupied lending. Investment loans rarely qualify for a waiver regardless of your profession. If you are considering a property requiring a loan above 80 per cent of the purchase price, factor the LMI premium into your upfront cost and compare it against the benefit of entering the market sooner versus saving a larger deposit.

A smaller deposit also reduces your serviceability because the higher loan amount increases the repayment tested under the buffer. Borrowing $540,000 at 90 per cent loan-to-value requires higher income to service than borrowing $480,000 at 80 per cent, even before considering the LMI premium.

What to Consider Before You Apply

Start by reviewing your current debt position and how much of your income is already committed to repayments, school fees, and living expenses. Lenders assess your ability to service a new loan based on your net income after those commitments, and the debt-to-income cap now adds a hard ceiling for some applicants.

If you are looking at a newly constructed property, confirm with the developer or builder whether the dwelling meets the definition of an eligible new build under the tax reforms. Not every off-the-plan apartment or house and land package qualifies, particularly if the development replaces existing dwellings without increasing the total count. The Australian Taxation Office has not yet released detailed guidance on every scenario, so speak with a tax adviser before committing.

Refinancing your home loan to release equity for a deposit on an investment property requires the lender to assess both loans together under the serviceability buffer and debt-to-income cap. Releasing $100,000 in equity increases your home loan by that amount, which increases your total debt and reduces what you can borrow for the investment property. Some lenders allow you to capitalise the released equity into the investment loan if it is used for the deposit, which keeps the debt deductible, but others require the equity release to remain on your home loan.

Call one of our team or book an appointment at a time that works for you. We work with principals across Australia and can help you understand how the changes to negative gearing, debt-to-income caps, and investment loan options apply to your situation. Whether you are buying your first investment property or expanding your property portfolio, we will walk through the numbers with you and identify lenders that fit your borrowing position and property type.

Frequently Asked Questions