When to Choose Location Over Returns in Investment Property

Selecting an investment property today means weighing returns against the revised negative gearing rules, capital gains treatment and serviceability settings that came into effect from mid-2026.

The decision you're making right now is not whether to invest, but which property will deliver the outcome you're after under the current framework. That requires clarity on your objective: are you building accessible income, deferring tax through quarantined losses, or positioning for a capital gain that will be indexed rather than discounted when you eventually sell?

When New Build Eligibility Changes the Calculation

A new residential dwelling, constructed on previously vacant land or added to an existing site, remains eligible for full negative gearing and the option to elect the 50 per cent CGT discount on sale. An established dwelling acquired after 12 May 2026 quarantines any rental loss, restricting it to offset against other residential rental income or future gains from that property.

Consider a prosthodontist acquiring a townhouse in a newly completed development in Kedron, Brisbane. The dwelling was constructed on formerly vacant commercial land and is being let immediately. Interest on the loan, body corporate levies, and rates generate a $14,000 loss in the first full year. Because the property qualifies as an eligible new build, that loss can be offset against the prosthodontist's taxable income, reducing tax by around $6,300 at a marginal rate of 45 per cent. An established unit purchased in the same suburb at the same price would quarantine the loss, providing no immediate tax relief but preserving it to offset future rental surpluses or gains on sale.

The benefit of new build status compounds when you hold the property for more than a decade and elect the 50 per cent discount at sale, rather than indexed cost base with a 30 per cent minimum rate. For high earners, the discount often delivers a lower effective rate, especially when the disposal occurs in a year with lower assessable income.

How Vacancy and Body Corporate Costs Affect Serviceability

Lenders assess rental income on a discounted basis, applying a haircut of 20 per cent to account for vacancies, management fees and unrecoverable outgoings. A unit leased at $650 per week, or $33,800 per annum, is credited as $27,040 in serviceability.

When body corporate fees are high, the net position deteriorates quickly. A two-bedroom apartment in an inner-city tower might carry quarterly levies of $1,800, or $7,200 per year. Combined with council rates of $1,600 and landlord insurance of $800, the holding costs before interest reach $9,600. If the loan is interest-only at 6.5 per cent on a borrowing of $500,000, interest adds another $32,500. Total outgoings of $42,100 exceed the serviceability-adjusted rental income by $15,060, which the lender deducts from your surplus income when calculating how much you can borrow for this or any subsequent property.

In our experience, prosthodontists underestimate how quickly strata-heavy assets erode borrowing capacity, especially when planning to add a second investment within three years. Running the numbers before you sign a contract prevents the scenario where you're locked into a property that blocks the next acquisition.

Interest-Only Versus Principal and Interest for Tax and Equity

An interest-only loan on an investment property preserves the deductible interest component and frees up cash flow, but it does not build equity through repayment. A principal and interest structure reduces the loan balance each month, lowering the interest deduction over time but improving your loan to value ratio and your ability to access equity for further investment.

The choice depends on whether you're optimising for current tax relief or future leverage. A prosthodontist in the first five years of practice, expecting income to rise as referrals build, may prefer interest-only to maximise deductions now and transition to principal and interest once earnings stabilise. A specialist three years from retirement may favour principal and interest to pay down debt ahead of reduced income.

Switching from interest-only to principal and interest mid-term is a product feature on many investment loan products, allowing you to adjust as circumstances change without refinancing. Check the terms before you settle, as some lenders require a full reapplication to make the change.

Loan to Value Ratio and Lenders Mortgage Insurance on Investment Purchases

Most lenders cap investment loans at 90 per cent LVR for standard applicants, with Lenders Mortgage Insurance required above 80 per cent. The premium is calculated on the amount borrowed above 80 per cent and is typically capitalised into the loan, increasing both the balance and the interest cost over the life of the facility.

Prosthodontists employed in public hospitals or holding fellowship with the Royal Australasian College of Dental Surgeons may be eligible for LMI waivers up to 90 or occasionally 95 per cent on owner-occupied purchases, but those waivers rarely extend to investment property. If you're borrowing at 85 per cent LVR on a $600,000 property, the LMI premium might be $11,000, pushing the total loan to $511,000 and lifting annual interest by around $715.

The alternative is a larger deposit or the use of equity from an existing property. Equity release from your principal place of residence can fund the deposit on the investment without selling an asset, though it does increase your overall debt and must be serviced within the lender's buffer.

How the Debt-to-Income Cap Affects Portfolio Expansion

From 1 February 2026, lenders may allocate only 20 per cent of new investor loans to borrowers at six times gross income or higher. If your taxable income as a prosthodontist is $220,000 and you hold an owner-occupied loan of $650,000, adding an investment loan of $500,000 takes your total debt to $1,150,000, or 5.2 times income. You remain within the threshold.

If you're considering a second investment property within 18 months, the combined debt would exceed six times income, placing you in the capped cohort. Lenders manage this by prioritising applications earlier in the quarter or rejecting applications that would breach their internal allocation. Timing matters: submitting in the final weeks of a reporting period increases the chance your application is declined or delayed, even when you meet all other criteria.

Variable Rate, Fixed Rate or Split for Investment Lending

A variable rate investment loan allows you to make additional repayments and access offset or redraw, which is useful if you're planning to pay down the loan faster or hold surplus cash in the structure. A fixed rate locks in repayments for one to five years, insulating you from rate rises but removing flexibility to prepay without incurring break costs.

A split loan, with half the balance fixed and half variable, is common among specialists who want certainty on half the commitment while retaining access to offset on the variable portion. The fixed portion provides budgeting stability, while the variable half allows you to capture rate cuts and adjust repayments as income fluctuates.

Investment loan refinancing becomes relevant when the fixed term expires or when you've accumulated enough equity to negotiate a lower rate or remove LMI by dropping below 80 per cent LVR.

Selecting Property Type and Location for the Revised Framework

Under the quarantining rules, established properties still deliver capital growth and eventual offset of losses against gains, but they defer the tax benefit. New builds deliver immediate deductions but often trade location or scarcity for eligibility.

A prosthodontist focused on long-term wealth accumulation might choose an established house in an inner-ring suburb with tight supply, accepting quarantined losses in exchange for stronger capital growth and land value appreciation. A specialist prioritising current cash flow and tax relief would favour a new apartment or townhouse in a growth corridor, capturing the deduction now and holding for the indexed gain or discounted treatment on sale.

The decision is not which property type is objectively superior, but which aligns with your current income, time horizon and portfolio strategy. If you're expanding your property portfolio from one to three properties over the next decade, the first acquisition sets the structure for what follows.

Claimable Expenses and Maximising Deductions Within Quarantining

Interest, council rates, water charges, body corporate fees, landlord insurance, property management fees, repairs and depreciation on fixtures and fittings remain claimable on investment properties. For new builds, these deductions reduce taxable income immediately. For established dwellings acquired after 12 May 2026, they're quarantined but accumulate to offset future rental income or capital gains.

Depreciation on new builds is higher in the first five to ten years, as plant and equipment items such as ovens, air conditioners and blinds can be written down at accelerated rates. Established properties acquired after May 2017 do not allow depreciation on previously claimed plant items, reducing the deduction pool.

Stamp duty is a holding cost but is not deductible. In Queensland, stamp duty on a $550,000 investment property is approximately $15,925. In New South Wales, it would be around $21,000. This cost is sunk at settlement and does not form part of the claimable expense base, though it does increase the cost base for capital gains purposes.

Rental Income, Serviceability and the Three Per Cent Buffer

Lenders assess your ability to service an investment loan by adding the proposed repayment, minus 80 per cent of the rental income, to your existing commitments, then testing the total at the product rate plus three percentage points. If the variable rate is 6.4 per cent, serviceability is tested at 9.4 per cent.

A $500,000 loan at 9.4 per cent over 30 years requires a monthly repayment of approximately $4,180, or $50,160 per annum. If rental income is $33,800, the lender credits $27,040, leaving a net cost of $23,120 that must be covered by your surplus income after tax, living expenses and other debt.

Prosthodontists with practice ownership often have fluctuating declared income due to deductions for equipment, fit-out and professional indemnity. Lenders may average income over two years or request additional evidence of capacity, such as trust distributions or dividend history, to support the application. Providing a clear picture of income early in the process, ideally with your accountant's input, reduces the chance of a last-minute serviceability shortfall.

Structuring the Loan Application for Approval and Future Flexibility

An investment loan application includes proof of income, existing loan statements, a copy of the sale contract, and evidence of deposit or equity position. If you're using equity from your home, the lender will revalue that property and confirm the available amount after retaining 80 per cent LVR or the policy limit on the security.

Lenders differ in how they treat rental income on properties not yet settled. Some will include projected rent in serviceability once the contract is unconditional and a lease is signed. Others will not credit the income until after settlement, which can compress your borrowing capacity if you're applying for a second property before the first is tenanted.

Choosing a lender with policy settings that match your structure is as important as the rate. We regularly see applications declined due to policy mismatches that could have been avoided by selecting a different lender from the outset, without any change to the borrower's financial position.

If you're weighing whether to proceed with a purchase now or wait for further clarity on how the ATO will administer the new build carve-outs and quarantining, call one of our team or book an appointment at a time that works for you. We'll work through your current position, your portfolio objective, and the loan structure that fits both without locking you into a product that limits what you can do next.

Frequently Asked Questions