Buying an investment townhouse is exciting, and a few early finance choices can shape how comfortable it feels over the years that follow. The most useful thing to know is that your loan structure and your tax position need to be planned together, before you sign a contract.
This guide is for anyone weighing up an investment loan for a townhouse. It covers the five mistakes we would most like to help you avoid.
Why Does Borrowing Power Matter Before You Look at Townhouses?
Your borrowing power sets the price range you can safely shop in, so work it out before you inspect anything. Banks test your repayments at a rate at least 3.0 percentage points above the loan's actual rate, so your capacity is lower than the repayment you would actually make.
Rental income helps, but lenders usually count only part of it. APRA's guidance says prudent lenders count no more than 80 per cent of expected rent, to allow for gaps between tenants. Lenders also treat the rent on a new purchase differently from rent already being received, and policies vary between lenders.
Our borrowing capacity page is a good place to start. We can then compare investment loan options from banks and lenders across Australia to match your situation.
Is Interest-Only the Right Choice for an Investment Townhouse?
Interest-only repayments lower your repayments for a set period, but they do not increase how much you can borrow. Lenders assess an interest-only loan as if you will repay principal and interest over the shorter remaining term, so capacity can actually be lower.
The trade-off is that you do not reduce the loan balance during the interest-only period. When it ends, repayments rise because the same debt must be repaid over fewer years.
As an illustration, using a rate of 6.75% p.a. and a $600,000 loan, interest-only repayments would be about $3,375 a month (600,000 x 6.75% / 12). Say the loan runs for 30 years with 5 years interest-only. Principal and interest over the remaining 25 years at the same rate would be roughly $4,145 a month. That is about $770 more each month, and the balance would still be $600,000. This is an example only, and actual rates vary by lender.
On tax, interest on a loan used to buy a rental property is generally deductible, but the principal part of a repayment is not. Speak to your accountant about how this applies to you.
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Book a chat with a Finance & Mortgage Broker at Leveled Up Finance today.
Will Negative Gearing Still Work for Your Townhouse?
It depends on when you buy and whether the townhouse is established or a new build. Rules changed on 12 May 2026, so the purchase date and the type of property now matter.
For an established townhouse bought after 7:30pm AEST on 12 May 2026, a net rental loss can only be used against other residential property income from the 2027-28 income year. Properties bought between that date and 30 June 2027 can be negatively geared under the current rules until 30 June 2027 only. Eligible new builds can still deduct losses against all income.
A townhouse on a newly subdivided block may or may not qualify as a new build, so check with your accountant before relying on any tax outcome. Capital gains tax rules also change from 1 July 2027, which affects your long-term plan.
A negatively geared property also costs you money each week. You need to be comfortable covering the gap from your own income if rent falls short.
What Costs Come With a Townhouse That a House Loan Might Miss?
Townhouses usually come with body corporate fees, and these affect both your cash flow and your finance plan. Strata levies reduce what you keep from rent, so build them into your budget.
Consider a buyer who finds a townhouse that looks affordable on rent and loan repayments alone. Once they add body corporate levies, insurance, council rates and property management fees, the weekly cash flow is tighter than expected. The solution is to run the full numbers first, including a buffer for vacancy. They can then choose a lower purchase price, or pick a loan structure with an offset account to reduce interest. The outcome is a purchase they can afford if the property sits empty for a few weeks, instead of one that depends on perfect conditions.
It also pays to read the strata records for upcoming special levies. Stamp duty is another upfront cost, and it varies by state, so check the figure for where you are buying.
How Much Deposit Do You Need as an Investor?
Most lenders want a deposit of at least 20 per cent to avoid Lenders Mortgage Insurance (LMI), but this is lender policy rather than a legal rule. Borrowing above an 80 per cent loan to value ratio (LVR) generally needs both lender and insurer approval.
The trade-off with a smaller deposit is that LMI is paid by you and adds to your costs. Some lenders also cap the LVR they offer on investment purchases.
If you already own a home, you may be able to use equity as part of your deposit. Remember that interest deductibility depends on what the borrowed money is used for. Money borrowed for personal use is not deductible, even if the loan is secured by an investment property.
Should You Check Your Existing Loans First?
Yes, your current debts affect how much a lender will let you borrow for a townhouse. Lenders look at your existing loans, credit card limits and the interest rate on each.
A loan health check can show whether you are paying more than you need to. Refinancing an existing loan may free up cash flow or help you restructure before you buy. It can come with discharge fees, valuation fees and possibly break costs on fixed loans, so we weigh these against the benefit. If your fixed rate is ending soon, our fixed rate expiry page explains your options.
For a broader view of how we help investors, see our investment loans page.
Ready to plan your townhouse purchase? Call one of our team or book an appointment at a time that works for you. We will help you compare lenders, structure your loan and work out what you can comfortably afford.
Frequently Asked Questions
Does interest-only increase how much I can borrow for an investment townhouse?
No. Lenders assess interest-only loans on principal and interest repayments over the remaining term, so your borrowing capacity can be lower. Repayments are lower during the interest-only period, but they rise when it ends.
How much of the rent do lenders count?
APRA's guidance says prudent lenders count no more than 80 per cent of expected rent. Each lender sets its own rental income policy, so it varies.
Is negative gearing still available on an investment townhouse?
It depends on the purchase date and property type. Established properties bought after 12 May 2026 face new limits from the 2027-28 income year, while eligible new builds can still deduct losses against all income. Check with your accountant.
Do I need a 20 per cent deposit for an investment property?
A deposit of 20 per cent or more generally avoids LMI, but this is lender policy rather than a legal rule. A smaller deposit may be possible, with LMI and lender approval.
