Rentvesting maths: what lenders count as rental income

A rentvestor's plan usually starts with a clean piece of arithmetic: rent out the investment for $620 a week, pay $700 a week where you want to live, and the shortfall is manageable. The lender's arithmetic is different, and it is the lender's arithmetic that decides how much you can borrow.

Shading, and why it exists

Almost every lender discounts gross rental income before counting it, typically by twenty to twenty-five per cent. The discount is meant to absorb vacancy, management fees, rates, insurance and maintenance in one blunt number. Some lenders shade less and then assess those costs individually, which can suit a well-managed property.

Then the buffer is added on top

• Your new loan is assessed at roughly three per cent above the actual rate, not at the rate you will pay.
• Existing investment loans are assessed at their own buffered rate, even if they are fixed for four more years.
• The rent you pay where you live is counted as an expense in full, with no shading in your favour.
• Negative gearing benefits are added back by some lenders and ignored entirely by others.

“Borrowing power is not a number you have. It is a number a particular lender's policy produces about you, and it varies more than clients expect.”

This is why lender selection matters more on an investment file than almost anywhere else. Two institutions with near-identical advertised rates can land six figures apart on the same borrower, because the difference is in the assessment policy rather than the price.

Investment Lending

Before you commit to a purchase price, get the assessment run against three lenders with different policies. It is a free exercise and it very often changes which property is realistic.