Avoid These 6 Mistakes When Buying an Investment Unit

Lenders apply stricter serviceability tests to contractors buying investment units than they do to employees purchasing the same property.

Your ABN income is assessed differently, vacancy assumptions are higher for units than houses, and the debt-to-income caps introduced in February now apply separately to investor borrowing. One misstep in how you structure your application can mean a decline from a lender who would otherwise approve you, or a loan amount tens of thousands below what you need.

Underestimating How Lenders Assess Your Contractor Income

Lenders require at least two full financial years of tax returns for self-employed applicants, and most average your net profit after add-backs across that period. If your most recent year shows a dip because you took legitimate deductions or retained profits in a company structure, your borrowing capacity can fall even when your actual cash flow is strong.

Consider a contractor earning $180,000 in gross receipts who claimed $60,000 in allowable expenses in one year and $40,000 the next. The lender will average the net figures, not the gross. If you lodge returns late, many lenders will not assess your application until the ATO has processed them and the Notice of Assessment is available. That delay can mean missing a property you want to secure.

When applying for an investment loan, we regularly see contractors surprised by how much documentation is required compared to an employee on a payslip. Bank statements for your business account, a profit and loss statement, and confirmation of GST registration are often needed alongside the tax returns. Some lenders will accept a single year if your industry or trade shows consistent demand and your accountant provides a letter confirming continuity, but that is not the norm.

Choosing the Wrong Loan Structure for Your Tax Position

Interest-only repayments lower your monthly outgoings and keep more of your borrowing tied to the investment property, which can matter under the new negative gearing rules. Principal and interest repayments reduce your debt faster, but they also reduce the amount of interest you can claim as a deduction.

From 1 July 2027, net rental losses on investment units purchased after 12 May 2026 can only be offset against other residential rental income or carried forward. They cannot be offset against your contracting income. If you plan to hold multiple rental properties, an interest-only period on each loan preserves your ability to claim maximum deductions and may allow you to use losses from one property against income from another, but only within the residential rental category.

In our experience, contractors with variable income prefer interest-only terms because they can make lump sum principal reductions in profitable years without being locked into higher monthly repayments during quieter periods. A variable rate loan with an offset account lets you park surplus cash and reduce interest charges without losing access to that cash if a contract ends unexpectedly.

Ignoring Body Corporate Records and Vacancy Rates Before You Apply

Lenders reduce the rental income they use in serviceability calculations to account for periods when the unit sits vacant. For investment units, most lenders apply a 5 per cent vacancy rate, though some use up to 10 per cent depending on location and building type. If the unit is in a building with known defects, a history of special levies, or a high proportion of investor-owned stock, some lenders will not accept it as security at all.

Body corporate records show whether the building has a sinking fund deficit, whether levies have increased sharply, and whether there are pending works that could trigger a special levy after you settle. A lender will request the body corporate certificate as part of their valuation process, but you should review those records before you make an offer. A $15,000 special levy announced three months after settlement can wipe out a year of rental income and leave you unable to meet repayments if you have not budgeted for it.

Strata reports also indicate whether the building allows short-term letting. Some lenders classify buildings with a high proportion of short-stay tenants as higher risk and either decline the application or reduce the loan to value ratio they will offer.

Miscalculating Borrowing Capacity Under the New Debt-to-Income Rules

Since 1 February 2026, lenders may only write 20 per cent of their new investor loans at a debt-to-income ratio of six times or higher. If your total borrowing, including your new investment loan, exceeds six times your annual income, you fall into that constrained portion of the lender's book. Many lenders are reserving that capacity for their highest-value customers or declining applications that breach the threshold.

For a contractor with an average assessed income of $120,000, total debt above $720,000 triggers the cap. If you already have a $500,000 mortgage on your own home and want to borrow $300,000 for an investment unit, your total debt is $800,000 and you sit above the threshold. That does not mean automatic decline, but it does mean fewer lenders will compete for your business and the ones that do may price the loan higher.

The cap applies separately to investor and owner-occupier portfolios, so your existing home loan does not directly limit your investment borrowing under the regulation, but most lenders still assess all your debt together when calculating serviceability. Understanding your assessed income before you start looking at units prevents wasted time on properties you cannot fund. A borrowing capacity review early in the process clarifies exactly where you sit.

Failing to Account for Settlement Costs Specific to Units

Stamp duty, conveyancing, and lender fees apply to any property purchase, but investment units also attract body corporate search fees, strata report costs, and sometimes higher lender valuation fees if the building is large or recently completed. Budget at least $2,500 for those additional costs on top of the usual settlement expenses.

Lenders Mortgage Insurance is calculated on your loan to value ratio, and if you borrow above 80 per cent of the unit's value, LMI can add several thousand dollars to your upfront costs. Some lenders allow you to capitalise LMI into the loan amount, but that increases your ongoing repayments and reduces the deposit equity you hold in the property.

Contractors often ask whether they can use a business line of credit or offset funds to cover settlement costs and preserve cash flow. You can, but if those funds are borrowed, the lender will treat them as a liability when calculating your serviceability. If the funds are genuine savings held in an offset account against your existing home loan, they do not affect your application.

Overlooking How Lenders Treat Rental Income from Older or Smaller Units

A one-bedroom unit in an older building will attract a lower rental assessment from most lenders than a two-bedroom unit in a newer complex, even if the actual rent achieved is identical. Lenders often apply a further discount to rental income if the unit is below a certain size, typically 50 square metres, or if it is located in a building with more than a set number of storeys.

Some lenders will not lend on studio apartments at all, regardless of location or rental yield. Others will lend but cap the loan to value ratio at 70 per cent instead of the usual 80 or 90 per cent. If you are looking at investment units in high-density precincts, confirm with your broker which lenders will accept that property type before you make an offer.

Rental income is typically assessed at 80 per cent of the market rent to account for vacancy and maintenance costs. If the property is tenanted at the time of application, the lender will use the lower of the lease amount and 80 per cent of a market appraisal. A lease agreement showing rent of $600 per week will be assessed at $480 per week in your serviceability calculation.

We work with contractors across Sydney who want to build wealth through property while managing the income fluctuations that come with contract work. Each lender applies different criteria to self-employed borrowers and to investment units, and knowing which combination delivers the loan amount and features you need can mean the difference between securing the right property and missing out. Call one of our team or book an appointment at a time that works for you.

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