How Do Rental Yields in Melbourne Impact Borrowing Capacity with a Broker?

By Lowest Interest Rates Australia

Introduction

When I bought my first investment property in Melbourne, I was obsessed with the location, the potential capital growth, and how close it was to good coffee—because let’s face it, we Melburnians have standards. But when I sat down with my mortgage broker, they asked me something that totally changed how I thought about property: “What’s the rental yield?”

I’ll be honest—I had no clue. I knew rent was important, but I didn’t realise just how much it could affect my borrowing power. Fast-forward to today, and I now understand that rental yield isn’t just a metric investors brag about at barbecues—it’s a major factor lenders use to determine how much money you can borrow.

In this article, I’ll break down exactly how rental yields in Melbourne impact your borrowing capacity, how brokers use that information to get you a better deal, and what strategies you can use to boost your loan approval odds as an investor.

Table of Contents

1. What Is Rental Yield?
2. Gross vs Net Rental Yield – What’s the Difference?
3. Typical Rental Yields in Melbourne
4. How Rental Yields Affect Borrowing Capacity
5. How a Broker Calculates Borrowing Power Using Rental Income
6. Other Factors Brokers Consider Alongside Rental Yield
7. Example: Borrowing Power with Different Rental Yields
8. Strategies to Improve Borrowing Capacity Through Rental Yield
9. Tools and Resources Brokers Use to Assess Yield
10. Final Thoughts – Work with Lowest Interest Rates

What Is Rental Yield?

In simple terms, rental yield measures how much income a property generates compared to its value. It tells investors how profitable their property might be and helps lenders assess whether that rental income can support your loan repayments.

Rental yield is calculated as:

Rental Yield (%) = (Annual Rent ÷ Property Value) × 100

For example, if a Melbourne apartment costs $600,000 and earns $30,000 per year in rent, the yield is:

(30,000 ÷ 600,000) × 100 = 5%

This 5% yield gives both you and your lender a snapshot of the property’s income potential. The higher the yield, the more rental income you’re generating—which can directly influence your borrowing capacity.

Gross vs Net Rental Yield – What’s the Difference?

1. Gross Rental Yield

This is the most commonly quoted figure. It simply looks at annual rent divided by property value, ignoring expenses. It’s a quick way to compare properties, but it doesn’t reflect your real cash flow.

2. Net Rental Yield

This gives a more accurate picture. It subtracts all costs—like property management fees, insurance, maintenance, and council rates—before calculating the yield. Lenders often prefer to see a net yield estimate because it better reflects actual income available to service a loan.

In short: Gross yield shows potential, net yield shows reality.

Typical Rental Yields in Melbourne

Melbourne’s property market is diverse, and yields vary greatly depending on suburb, property type, and tenant demand. Here’s a snapshot of typical figures as of 2025:

• Inner-city apartments: 4.0% – 5.5%
• Townhouses: 3.5% – 4.5%
• Outer suburban houses: 3.8% – 4.8%
• Regional Victoria: 4.5% – 6.5%

Post-COVID, yields in Melbourne have generally increased due to rising rental demand and limited supply. For investors, this means rental income is stronger—and potentially increases how much a lender is willing to approve for your next purchase.

How Rental Yields Affect Borrowing Capacity

Now to the heart of the matter: how do rental yields influence how much you can borrow?

When assessing your loan application, lenders look at your total income—including wages, bonuses, and rental income. However, they don’t count 100% of your rental income. Instead, they use a rental income shading policy.

Rental Income Shading Explained

Most lenders only consider 70–80% of your rental income as usable income. The remaining 20–30% is excluded to allow for potential vacancies, management fees, and maintenance costs.

For example, if your investment property earns $500 per week ($26,000 per year):

• At 80% shading, the lender counts $20,800 as income.
• At 70%, only $18,200 is considered.

That difference can significantly change your borrowing limit, especially if you own multiple properties.

The Higher the Yield, the Higher the Borrowing Capacity

Higher rental yields mean higher income, which improves your ability to service more debt. In other words, a property with a 5.5% yield will boost your borrowing capacity more than one with a 3.5% yield—all else being equal.

How a Broker Calculates Borrowing Power Using Rental Income

Mortgage brokers play a vital role in bridging the gap between your investment goals and lender policies. Here’s how they assess and optimise your borrowing capacity using rental yields:

1. Review your total income: They combine your employment income, other investment income, and rental income.
2. Apply lender shading rules: Brokers compare how different banks treat rental income (some use 70%, others 80%).
3. Factor in expenses: They assess your ongoing property costs, like strata and insurance, to calculate net cash flow.
4. Compare multiple lenders: Different banks have different appetite levels for investor lending—brokers match you to the best fit.
5. Provide borrowing projections: You’ll get a clear picture of how much you can borrow today—and how it changes if rental yields rise or fall.

The result? A tailored lending strategy that aligns with both your current income and your future property goals.

Other Factors Brokers Consider Alongside Rental Yield

While rental yield is important, it’s not the only number that determines borrowing power. Brokers and lenders also consider:

• Your personal income and expenses: Lenders look at how much you earn versus spend.
• Loan-to-value ratio (LVR): Higher deposits can reduce risk and improve approval odds.
• Credit score: A strong credit history can unlock better loan options.
• Property type: Apartments in certain Melbourne postcodes may have lending restrictions.
• Interest rates: Higher rates reduce how much you can borrow, even if your rental yield is solid.

That’s why a broker’s expertise is so valuable—they balance all these factors to maximise your borrowing potential.

Example: Borrowing Power with Different Rental Yields

Let’s compare two Melbourne properties with different yields to see how it impacts borrowing capacity.

Even though the regional property is cheaper, its stronger rental yield increases the usable income in your loan application—raising borrowing power by around $60,000 in this example.

Strategies to Improve Borrowing Capacity Through Rental Yield

If your goal is to grow your property portfolio, improving your rental yield can be a smart move. Here’s how to do it:

• Target high-demand areas: Suburbs near universities, hospitals, or transport hubs often have higher yields.
• Furnish your property: Short-term or furnished rentals can boost returns (just watch the tax implications).
• Review rent regularly: Keep up with market rates and adjust accordingly.
• Reduce vacancy time: Good property management ensures consistent income.
• Consider dual-occupancy setups: Two-income properties like granny flats can lift overall yield.

A broker can help you assess how these strategies affect your borrowing limits before you make your next move.

Tools and Resources Brokers Use to Assess Yield

Mortgage brokers use a range of tools and databases to accurately assess your property’s rental performance and lending potential, including:

• CoreLogic RP Data: Provides yield trends by suburb and property type.
• Valuer General Data: For market comparison and rental median insights.
• Lender Servicing Calculators: Custom tools that simulate how different banks assess income and expenses.
• Property Investment Software: To model scenarios based on yield, cash flow, and equity.

These tools help brokers find the sweet spot between yield and risk—ensuring your borrowing power is maximised without overextending your finances.

Final Thoughts – Work with Lowest Interest Rates

So, how do rental yields in Melbourne impact borrowing capacity? In short, the higher the yield, the more your rental income contributes to your borrowing potential. But since lenders only consider part of that income, understanding how it fits into your overall financial picture is key.

That’s where an experienced mortgage broker can make all the difference. A good broker doesn’t just look at the numbers—they help you structure your portfolio, identify high-yield opportunities, and negotiate the most competitive loan terms.

At Lowest Interest Rates, we work with investors across Victoria to maximise borrowing power and grow their property portfolios strategically. Whether you’re purchasing your first rental or adding to an existing portfolio, our expert brokers can guide you every step of the way.

🏠 Ready to find out how your rental yield affects your borrowing power? Visit LowestInterestRates.com.au today to connect with a Melbourne mortgage broker who can crunch the numbers and help you invest smarter.