Avoid These 4 Mistakes When Financing a Townhouse

Buying an investment townhouse in Chelsea starts with the loan, not the property. Four mistakes tend to cost investors the most: misreading the negative gearing rules, overestimating borrowing power, choosing a repayment type for the wrong reason, and forgetting costs outside the loan.

Chelsea is a bayside suburb on the Frankston line. Whatever you buy, the finance decisions you make first will shape your cash flow for years. Our investment loans page covers the basics, and this article focuses on the traps.

Negative Gearing on a Townhouse: Check the Rules Before You Buy

For an established townhouse bought after 7:30pm AEST on 12 May 2026, rental losses from the 2027-28 income year can only be offset against other residential property income, not your salary. Properties held at that time, and eligible new builds, keep the current treatment.

This matters because a townhouse can be either established or an eligible new build. Dwellings built on previously vacant land, or replacing a property where the number of dwellings increases, can qualify. A knock-down rebuild that does not add dwellings, or a substantial renovation, does not. A new build that has been occupied for more than 12 months before it is sold to a later investor also loses access.

A townhouse bought between 12 May 2026 and 30 June 2027 can be negatively geared under the current rules only until 30 June 2027. Interest remains deductible, but the way a net loss can be used changes. Tax outcomes depend on your circumstances, so speak with your accountant before you commit to a purchase.

How Much Can You Borrow for an Investment Townhouse?

Your investor borrowing power depends on your income, your debts, the lender's policy and the rent the lender is willing to count. Banks must assess you at a rate at least 3.0 percentage points above the loan's actual rate, so the loan you can afford on paper is smaller than the repayment you will actually make.

Lenders also tend to count only part of the expected rent. APRA's guidance says prudent policies count no more than 80 per cent of expected rent, to allow for periods when the property is empty. Lenders usually place less weight on a rental appraisal than on actual rent received. Credit card limits count as debt too, even when the balance is zero, so closing unused cards before applying can lift your result.

We can run your numbers across lenders before you inspect a single townhouse. Start with our borrowing capacity page, then talk to us about how rent, existing loans and your home loan fit together.

Interest Only or Principal and Interest on an Investment Loan?

Interest only keeps repayments lower for a set period, usually between one and five years, because you are not paying down the loan. Principal and interest costs more each month but reduces what you owe.

As an illustrative example at 6.75% p.a., consider an investor with a $500,000 loan on a townhouse. Interest only costs about $2,813 a month. Principal and interest over 30 years costs about $3,243 a month. If the investor chooses five years interest only, the loan balance is still $500,000 at the end of that period. Repayments then move to principal and interest over the remaining 25 years, at about $3,455 a month at the same rate.

The outcome is about $430 a month of extra cash flow for five years, followed by a repayment about $212 a month higher than the 30-year principal and interest figure. The trade-off is that you have not built any equity through repayments, so any growth in the townhouse's value is doing all the work. Interest only also does not increase borrowing power. Lenders assess it on principal and interest over the shorter remaining term.

On tax, interest on a loan used to buy a rental property is deductible, but the principal part of a repayment is not. Your accountant can confirm how this applies to you. Many lenders offer both fixed and variable rates on interest only and principal and interest loans, though availability and features vary by lender, and a fixed rate may carry break costs if you exit early. Use a repayment calculator to test your own figures.

Costs Outside the Loan: Stamp Duty, LMI and Owners Corporation Fees

The loan only covers part of what a townhouse purchase costs. Stamp duty, legal fees and, for higher borrowing, lenders mortgage insurance all need to be funded separately or planned for.

LMI is generally required when your loan is more than 80 per cent of the property's value. The borrower pays the premium, and it rises with the loan size and the loan to value ratio (LVR). Borrowing above 80 per cent needs approval from both the lender and the insurer. It lets you buy with a smaller deposit, but it adds a cost that does not build equity.

Many townhouses also sit within an owners corporation, often called a body corporate. Ask for the fee levels and any planned works before you make an offer, because those fees reduce your net rent. If you already own a home, you may be able to use equity as the deposit, but you would be taking on more debt against that home. Review your existing loan first through our refinancing service, as a restructure can change what is available.

Our local team at EZ Homes and Finance in Chelsea can compare lenders across Australia and match a loan to your wealth plan. Call one of our team or book an appointment at a time that works for you, and we will map out your townhouse purchase before you make an offer.

Frequently Asked Questions