What Are Investment Loans for Purchasing a Unit?

Investment loans for purchasing a unit allow you to borrow funds to buy an apartment or unit specifically for rental income and capital growth.

The structure differs from owner-occupied home loans because lenders assess these applications based on rental income potential rather than just your salary. Victorian property investors often target units in areas like South Yarra, Docklands, or Box Hill where rental yields support loan serviceability, but the loan amount you can access depends on how lenders calculate rental income and factor in vacancy periods.

How Lenders Calculate Your Investment Loan Amount

Lenders typically assess 70-80% of potential rental income when calculating your borrowing capacity for an investment property.

Consider a buyer who identifies a two-bedroom unit in Carlton for $650,000 with an expected rental return of $600 per week. The lender calculates serviceability using approximately $480 per week (80% of $600), then deducts existing debts, living expenses, and applies a buffer rate above the actual interest rate. With a 20% deposit of $130,000 plus stamp duty of around $34,000, this buyer needed $164,000 in savings and accessible equity. The lender approved a loan amount of $520,000 based on the rental income covering repayments at their assessment rate, even though the buyer's salary alone would not have supported that level of borrowing. This demonstrates how rental income strengthens your position when seeking finance for units in high-yield areas.

Body corporate fees create an additional consideration that owner-occupied borrowers do not face. Lenders deduct quarterly strata fees from the rental income calculation, which reduces your borrowing capacity. A unit with $1,500 per quarter in body corporate fees effectively reduces your net rental income by approximately $115 per week in the lender's assessment.

Interest Only Investment Structures and Cash Flow

Interest only repayments allow you to pay only the interest component of the loan for a set period, typically one to five years, reducing monthly costs and maximising tax deductions.

Victorian property investors commonly select this option because it improves cash flow during the initial years when rental income may not fully cover all property expenses. On a $500,000 loan at current variable rates, the difference between principal and interest repayments and interest only repayments can amount to several hundred dollars per month. That additional cash flow helps cover periods when the unit sits vacant between tenants or when unexpected maintenance costs arise.

The tax treatment also differs under interest only structures. The entire interest component remains a claimable expense against your rental income, whereas principal repayments represent equity building rather than a tax deduction. After the interest only period concludes, the loan typically reverts to principal and interest unless you apply to extend the arrangement. This approach suits investors focused on portfolio growth rather than paying down debt during the accumulation phase.

Deposit Requirements and Lenders Mortgage Insurance

Most lenders require a minimum 10% deposit for investment property finance, though a 20% deposit allows you to avoid Lenders Mortgage Insurance.

LMI protects the lender if you default on the loan, but you pay the premium, which can add tens of thousands to your upfront costs. On a $600,000 unit in Richmond with a 10% deposit, LMI might cost $18,000 to $25,000 depending on your loan to value ratio and the lender's LMI provider. With a 20% deposit of $120,000, you eliminate that cost entirely and often access better investor interest rates. Lenders view a larger deposit as reduced risk, which translates to rate discounts of 0.10% to 0.30% compared to higher LVR loans.

Some lenders also accept equity from your existing home as the deposit. If your owner-occupied property in Geelong has grown in value and you have at least 20% equity remaining after releasing funds, you can leverage equity to purchase the investment unit without using cash savings. This strategy requires careful calculation of your borrowing capacity across both properties and consideration of how servicing two loans affects your financial position.

Variable Rate Versus Fixed Rate Investment Loan Products

Variable interest rate investment loans allow you to make additional repayments and access offset accounts, while fixed interest rate products lock in your rate but typically restrict these features.

Investors who anticipate selling the unit within a few years often prefer variable products because fixed rate break costs can eliminate any benefit from rate stability. If you fix at 6.20% for three years but need to sell after 18 months when rates have dropped to 5.80%, the lender charges break costs to compensate for their funding loss. Those costs can reach $10,000 to $20,000 on a $500,000 loan depending on the rate differential and remaining fixed period.

Variable products also provide flexibility if your circumstances change and you want to increase repayments or pay down the loan faster than originally planned. Offset accounts linked to variable rate investment loans allow you to park rental income and reduce interest charges without making the funds inaccessible, though the tax treatment differs from owner-occupied offset arrangements. The interest saved is not a tax deduction, but you reduce the total interest paid over time.

Negative Gearing Benefits and Victorian Stamp Duty

Negative gearing occurs when your rental income falls short of your property expenses, creating a tax-deductible loss that reduces your overall taxable income.

Most investment units in metropolitan Melbourne run at a loss during the first few years, particularly after accounting for loan interest, body corporate fees, property management costs, insurance, and depreciation. If your rental income totals $31,200 per year but expenses reach $38,000, you declare a $6,800 loss against your salary income. At a marginal tax rate of 37%, that reduces your tax liability by approximately $2,500, improving your after-tax cash flow position.

Stamp duty in Victoria adds significantly to the upfront cost of purchasing an investment unit. Unlike first home buyers, investors receive no concessions or exemptions, paying the full rate calculated on the purchase price. A $700,000 unit in Southbank attracts stamp duty of approximately $38,000, which you need to fund from savings or capitalise into the loan if your LVR allows. This cost cannot be claimed as an immediate tax deduction but forms part of the capital gains tax calculation when you eventually sell the property.

Investment Loan Application Requirements for Unit Purchases

Lenders require rental appraisals from licensed property managers, contract of sale documentation, and evidence of your deposit source when assessing investment loan applications.

The rental appraisal must come from a property manager familiar with the local area and supported by comparable rental properties currently on the market. A generic estimate will not satisfy lender requirements. They want confirmation that the unit in Footscray or Brunswick can achieve the rental return you have projected, supported by recent leasing data for similar properties in the same building or street.

Your deposit must show a clear savings history of at least three months unless it comes from the sale of another property or equity release. Lenders reject applications where the deposit appears suddenly in your account without explanation, as this suggests borrowed funds that increase your actual debt position beyond what their assessment captures. Genuine savings, inheritance with supporting documentation, or equity from an existing property all satisfy this requirement. If you are purchasing in a building with a high proportion of investor-owned units, some lenders may apply additional scrutiny or decline the application altogether based on their assessment of building risk.

Call one of our team or book an appointment at a time that works for you to discuss your investment loan options and how rental income strengthens your borrowing capacity across Victoria.

Frequently Asked Questions