When to Buy an Investment Townhouse and How to Fund It

The right time to buy an investment townhouse is when your finances can carry the loan comfortably and you understand the tax rules that apply to the property you choose. The negative gearing changes were announced on 12 May 2026, and that date is the cut-off for grandfathering, so timing matters more than it used to.

This guide is for Narellan residents weighing up an investment loan for a townhouse. We will cover the tax change, the repayment choice, borrowing power and the costs that catch people off guard.

When Is the Right Time to Buy an Investment Townhouse?

The right time is when you can cover the repayments and holding costs even if the property sits vacant for a while, and when you have checked how the new negative gearing rules apply to your purchase. Cash flow comes first. Tax is a bonus, not the plan.

A good test is to run the numbers with no rent at all for a few weeks, then with rent at a realistic level. Lenders do something similar. APRA's guidance says prudent lenders count no more than 80 per cent of expected rent, to allow for periods when the property is empty. Your own budget should be at least as cautious as that.

How the Negative Gearing Change Affects a Townhouse Purchase

From the 2027-28 income year, net rental losses on established residential properties bought after 7:30pm AEST on 12 May 2026 can only be deducted against other residential property income. Losses on properties held at that time, and on eligible new builds, can still be deducted against all income.

If you buy an established townhouse between 12 May 2026 and 30 June 2027, the current rules apply until 30 June 2027 only. After that, the loss is limited and any excess can be carried forward to offset future residential property income. An eligible new build is different. It includes a dwelling built on previously vacant land, or one that replaces an existing property where the number of dwellings increases. A townhouse may or may not meet that test, so check the details before you sign.

The change does not affect whether interest is deductible. It affects how a net rental loss can be used. Please speak with your accountant about your own situation, because the outcome depends on your income and the property.

Interest-Only vs Principal and Interest: A Worked Example

Interest-only repayments are lower in the short term, but they do not reduce your loan, and the repayments rise when the interest-only period ends. Principal and interest repayments cost more each month but pay the debt down from day one.

Consider an investor with a $500,000 investment loan over 30 years. This is an illustrative example at 6.75% p.a., not a current offer. Here is how the two structures compare:

• Interest-only for the first five years: about $2,813 a month.
• Principal and interest over the full 30 years: about $3,243 a month.
• Interest-only for five years, then principal and interest over the remaining 25 years: about $3,455 a month from year six.

The investor chooses interest-only to ease cash flow while the townhouse is first rented. The outcome is roughly $430 a month saved in the early years compared with principal and interest. The trade-off is that the balance is still $500,000 at year six, and the repayment then rises from about $2,813 to about $3,455 a month, an increase of about $642. That is about $212 more than a 30-year principal and interest loan would have cost. They need to be ready for that step up.

On tax, only the interest part of a repayment is deductible under either structure. The principal part is not. The deductible amount depends on the loan balance and the rate, and a higher deduction would simply come from paying more interest, which is a cost, not a benefit. Ask your accountant how it applies to you.

How Much Can You Borrow for an Investment Property?

Your borrowing power depends on your income, existing debts, living costs and the lender's assessment rate. Banks must test your ability to repay at a rate at least 3.0 percentage points above the loan rate.

An interest-only feature does not lift your borrowing power. For interest-only loans, APRA expects lenders to assess repayments as principal and interest over the remaining term after the interest-only period. That can mean a lower maximum loan than you would get on principal and interest. Existing debts matter too, including credit card limits, which lenders can assess using a notional repayment based on the limit. You can get a feel for your numbers using our borrowing capacity page, then compare lenders through our investment loans service.

Deposit, LVR and LMI on an Investment Townhouse

Lenders mortgage insurance (LMI) is generally required when your loan-to-value ratio (LVR) goes above 80 per cent. The 80 per cent mark is not a legal borrowing limit, but borrowing above it needs approval from both the lender and the insurer.

The LMI premium is paid by you, and its size depends on the loan amount and LVR. A larger investor deposit usually brings your LVR down and can avoid LMI. The cost of a bigger deposit is that you tie up more of your own cash, which can limit how fast you build a portfolio. Each lender sets its own rules on maximum LVR, so it pays to compare more than one.

If you already own a home, you may be able to use equity as part of your deposit. Remember that borrowing against equity does not make the interest deductible by itself. Deductibility depends on how the borrowed money is used. Redraws and equity releases used for private purposes are not deductible, so keep investment and personal borrowing separate.

Body Corporate Costs and Holding Costs to Budget For

Many townhouses sit within a strata or community scheme, so a body corporate levy is often an ongoing cost on top of your loan repayments. Ask for the levy figure and any planned works before you commit.

Other holding costs include council rates, insurance, property management fees and repairs. Under current ATO rules, many of these are deductible for the period the property is rented or genuinely available for rent, but your accountant should confirm what applies to you. Build all of these into your monthly budget, then see how the property performs against your weekly rent.

If you already hold an investment loan, a loan health check or a look at refinancing may show whether your current structure still suits your plans before you add another property.

Call one of our team or book an appointment at a time that works for you, and we will walk you through your options as a Narellan investor.

Frequently Asked Questions