Top Tips to Build Wealth Through Property in Dromana

Investment Loan Structure: Interest Only or Principal and Interest

Interest-only repayments reduce your monthly commitment and preserve cash for portfolio growth or offset account deposits.

For a rental property held on an interest-only loan, the entire interest component remains a claimable expense against rental income. Switching to principal and interest reduces your deduction each month as principal is not deductible. Consider a buyer who holds an existing property in Dromana and is looking at a second purchase in Rosebud. At current variable rates, an interest-only period typically runs for five years before reverting to principal and interest. That period gives you time to assess whether the rental income supports the loan on its own or whether you want to add principal repayments once your income or equity position improves. Lenders also look at how long the interest-only term runs when calculating the loan's risk weight. A long-term interest-only structure with no specified end date or an end date beyond five years can push your investment loan into a higher risk category if your loan to value ratio sits above 80 per cent, which flows through to pricing.

Principal and interest from day one builds equity faster and may appeal to investors who want to own the property outright before retirement. The trade-off is higher monthly repayments and less flexibility if rental income drops or vacancy extends beyond a few weeks.

Deposit and Borrowing Limits for Dromana Investors

Most lenders require a 20 per cent deposit for an investment property to avoid Lenders Mortgage Insurance and keep borrowing costs down.

If your deposit sits below 20 per cent, you will pay LMI as a one-off premium added to your loan or paid upfront. The premium scales with the loan amount and the LVR. A smaller deposit also means a higher debt-to-income ratio, which brings you closer to the 20 per cent lending cap that now applies to borrowers with total debt six times or more than their annual income. In our experience, Dromana residents considering a coastal investment property often release equity from an existing home rather than drawing on cash savings. Releasing equity through a refinance or top-up on your current home loan gives you access to a deposit without liquidating offset balances or term deposits. Lenders assess your ability to service both the existing loan and the new investment loan at a rate 3.0 percentage points above the actual product rate. That serviceability buffer has been in place since late 2021 and remains unchanged.

Tax Treatment: Negative Gearing and Capital Gains from 2027-28

Losses on rental properties acquired after 12 May 2026 can only be offset against other residential property income from the 2027-28 income year onward.

If you purchased an investment property before that date, or you buy a new build (defined as a dwelling constructed on vacant land or a development that increases the number of dwellings on a site), you can still deduct rental losses against your salary, business income or other assessable income. Established properties bought after 12 May 2026 are quarantined. Losses carry forward and can be used to reduce future rental income or capital gains on residential property when you sell. For Dromana investors holding an older property that is negatively geared, the deduction continues to flow through your annual tax return as it always has. The change affects your decision about where to buy and what type of property to target. A new apartment development near the foreshore may qualify as a new build, while an established house on a single title a few streets back will not. The distinction matters if you expect the property to run at a loss in the early years.

From 1 July 2027, capital gains on residential investment properties will be taxed differently depending on when you bought. Gains that accrued before that date still attract the 50 per cent discount if you have held the property for more than 12 months. Gains that accrue after that date are indexed to inflation and taxed at a minimum 30 per cent rate on the real gain. If you bought before 1 July 2027 and sell afterwards, you split the gain into a pre-July 2027 portion and a post-July 2027 portion. New builds continue to access the 50 per cent discount as an alternative to indexation, giving you the option to choose whichever treatment produces the lower tax.

Rental Income and Vacancy Assumptions in Dromana

Lenders assess your borrowing capacity using the actual rental income you receive or a discounted figure if the property has not yet settled.

For a Dromana property, lenders typically apply a vacancy factor of around 4 to 5 per cent when calculating serviceable rental income, reflecting the seasonal nature of the bayside market. If you are buying a property that appeals to holiday tenants, the lender may reduce the income assumption further or ask for evidence of comparable long-term rental rates in the area. Dromana sits between the more tightly held suburbs closer to Mornington and the holiday-focused market toward Rye and Sorrento. A property within walking distance of the foreshore or Dromana village will generally hold a long-term tenant through winter, while a property set up for short stays may sit vacant outside the summer months. Lenders do not recognise short-term rental income in the same way they recognise a signed 12-month lease. If your strategy depends on Airbnb or similar platforms, you will need to service the loan based on your other income and treat any rental income as a bonus rather than a serviceability input.

Refinancing an Existing Investment Loan

Refinancing gives you access to a lower rate, a different loan structure or the ability to release equity for a second purchase.

If you took out an investment loan more than two years ago, your rate may be higher than what is available today, particularly if you have not asked your current lender for a discount or if you are still on the lender's standard variable rate. A refinance also lets you switch from principal and interest to interest only, or vice versa, without selling the property. Consider a scenario where you bought an investment property in Dromana several years ago and the property has increased in value. You now want to buy a second property but do not have enough cash for a deposit. Refinancing the first property releases equity up to 80 per cent of the current valuation, giving you a deposit for the second purchase while keeping LMI off the table. The refinance process includes a new valuation, a new serviceability assessment at the higher buffer rate and a review of your debt-to-income ratio across all loans. If your income has not kept pace with property price growth, you may find that releasing equity pushes your total borrowing above six times your income, which brings you into the 20 per cent cap that now applies to high-DTI lending. That cap is measured across each lender's portfolio each quarter, so it does not block your application outright, but it does mean the lender may price the loan higher or ask for a larger deposit than you expected.

Variable Rate or Fixed Rate for Investment Property

Variable rates give you flexibility to make extra repayments, redraw funds and offset income without penalty, while fixed rates lock in your repayment amount for a set period.

Most investment property finance is written on a variable rate because investors want the ability to use an offset account to park rental income and reduce interest without reducing the deductible loan balance. If you pay down principal, your deduction falls. If you deposit rental income into an offset account linked to the loan, your interest cost falls but the loan balance and the deduction stay the same. A fixed rate removes that flexibility. You cannot make extra repayments beyond a small annual cap, you cannot redraw, and most fixed-rate products do not offer an offset account. If you need to break the fixed term before it expires, you will pay a break cost that can run into thousands of dollars depending on how far rates have moved since you locked in. Fixed rates do provide certainty if you are concerned about repayment increases and you are comfortable with a set-and-forget approach for the next one to three years.

Call one of our team or book an appointment at a time that works for you. We work with lenders across Australia to find investment loan options that fit your equity position, your income and your plans for the property, and we can walk you through the tax changes and deposit requirements that apply to your situation.

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