Proven Tips to Finance Your First Investment Unit

Buying an investment unit brings you into contact with a different set of lending rules than owner-occupied property.

Lenders assess the income the property will generate, not just your personal income, and they apply stricter deposit requirements and different interest rate structures. If you live in Somerville and work locally or in nearby Frankston, an investment unit closer to transport, employment hubs, or coastal amenity can offer stronger rental demand and more predictable income than a house at the same price point.

What Deposit Do You Need for an Investment Unit?

Most lenders require a minimum 10% deposit for an investment property, but borrowing at 90% loan to value ratio triggers Lenders Mortgage Insurance, which can add several thousand dollars to your upfront costs. A 20% deposit avoids LMI entirely and opens up better rate options across a wider range of lenders. You also need to budget for stamp duty, conveyancing, building and pest inspections, and any immediate body corporate levies or repairs.

Consider a buyer who already owns a home in Somerville and has built up equity over several years. Rather than saving cash, they can access that equity to fund the deposit and costs for a unit in Frankston or Mornington, keeping their savings intact for other purposes. The lender values both properties and calculates how much can be released without exceeding 80% LVR across the portfolio. This approach is common among first-time investors who have been in their own home for five years or more.

How Lenders Assess Rental Income

Lenders use rental income to support your borrowing capacity, but they do not accept the full amount.

Most lenders apply a shading factor of around 80%, meaning if a unit generates $400 per week in rent, they will assess it as $320 for serviceability purposes. They also factor in vacancy assumptions, interest rate buffers, and your existing commitments. If you are still paying off your own home, both loans are considered together when calculating whether you can service the debt.

Rental income can be verified through a property manager's rental appraisal or comparable listings in the same building or precinct. For a unit near the Somerville town centre or within walking distance of schools and local shops, rental demand tends to be consistent, particularly among downsizers and young families who want proximity to services without the upkeep of a larger home.

Interest Only or Principal and Interest?

Interest only repayments are still widely used for investment loans because they reduce the monthly cash outflow and can improve short-term cash flow.

You pay only the interest portion for a set period, typically one to five years, after which the loan reverts to principal and interest unless you renegotiate. This structure suits investors who expect capital growth to outpace the lack of principal reduction, or who plan to use surplus cash flow to pay down other debt or fund additional purchases.

Principal and interest repayments cost more each month but reduce the loan balance over time and often attract a lower interest rate. If the property is neutrally geared or close to it, paying down principal can make sense, particularly if you are not planning to expand your portfolio in the near term. Some investors split their loan, with part on interest only and part on principal and interest, to balance cash flow with debt reduction.

Variable or Fixed Rate for Investment Property?

Variable rates give you the flexibility to make extra repayments, redraw funds, and switch loan features without penalty.

Fixed rates lock in your repayment amount for a set term, which can help with budgeting, but they come with restrictions. You typically cannot make extra repayments beyond a small annual limit, and breaking a fixed rate early can result in significant costs. For investment purposes, flexibility often outweighs certainty, particularly if you plan to use equity again within a few years or if interest rates are stable.

Some lenders offer better discounts on variable investment loans than fixed, particularly if you hold multiple products with them or have a strong deposit position. If you are refinancing an existing investment loan and rates have moved in your favour, a variable loan lets you take advantage of further cuts without waiting for a fixed term to expire.

Body Corporate and Ongoing Costs

Every unit comes with body corporate fees, and lenders want to see that you have factored these into your cash flow.

Quarterly fees can range from a few hundred dollars to several thousand depending on the age of the building, the amenities, and the sinking fund balance. Older buildings with lifts, pools, or pending major works tend to have higher fees and less predictable special levies. Lenders may request a body corporate certificate as part of the valuation process to confirm there are no outstanding disputes or significant works planned.

You can claim body corporate fees, council rates, property management fees, insurance, and interest as tax deductions in the year they are incurred. Depreciation on the building and fixtures adds another layer of claimable expense, particularly for units built after 1985. These deductions reduce your taxable income, which is one reason units remain attractive to investors even when the weekly rent does not cover all outgoings.

Changes to Negative Gearing and Capital Gains Tax from July 2027

If you purchase an established investment unit after 12 May 2026, you will not be able to claim rental losses against other income from 1 July 2027.

Losses can still be carried forward and offset against future rental income or capital gains from residential property, but the immediate tax benefit of negative gearing against your salary is removed. The 50% capital gains tax discount will also be replaced with an inflation-based calculation and a minimum 30% tax on gains. New builds remain exempt from these changes, so if you are deciding between an established unit and a new development, the tax treatment now differs significantly.

For investors in Somerville looking at units in nearby suburbs, this means the financial modelling needs to account for reduced tax offsets and different exit tax calculations. The property still generates rental income and potential capital growth, but the cash flow and after-tax return will look different under the new rules. Speaking to an accountant before you proceed is now more valuable than it has been in the past.

What Loan Features Matter for Investment Property?

An offset account linked to your investment loan does not provide the same tax advantage as it does for an owner-occupied loan.

Interest on an investment loan is tax deductible, so reducing that interest with an offset account also reduces your deduction. Most investors keep their offset accounts linked to non-deductible debt, such as their own home loan, and allow the investment loan to accrue interest that can be claimed. A redraw facility can still be useful if you make extra repayments and need access to funds, but you need to be careful that any redrawn amount is used for investment purposes to maintain the deductibility.

Portability is another feature worth considering if you plan to sell the unit and purchase another investment property in the future. Some lenders allow you to transfer the loan to a new security without reapplying or paying discharge fees, which can save time and cost if you are upgrading or relocating your investment.

Interest rate discounts are often negotiable, particularly if you are borrowing a larger amount, have a strong deposit, or are consolidating other lending with the same institution. A difference of 0.2% on a loan of $400,000 amounts to $800 per year, which compounds over the life of the loan.

How We Help Investors in Somerville Structure Their First Unit Purchase

We work with clients across the Mornington Peninsula who are moving from home ownership into investment, and the most common mistake we see is underestimating the importance of loan structure.

Choosing the right lender, loan type, and repayment method in the first instance saves you from costly refinancing later. We compare investment loan options from banks and non-bank lenders across Australia, and we help you understand how rental income, existing debt, and deposit source affect your borrowing capacity and serviceability.

If you are considering a unit in Frankston, Mornington, or Mount Eliza and you own property in Somerville, we can also arrange a valuation to confirm how much equity is available and whether it makes sense to use it now or wait until you have built a larger buffer. We also connect you with conveyancers, accountants, and property managers who understand the local market and the tax changes coming into effect in 2027.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions