Avoid These 7 Mistakes When Buying an Investment Apartment

Buying an apartment as an investment property requires a different approach to securing finance than purchasing a house.

Most lenders adjust their lending criteria when the security is an apartment, particularly in relation to loan-to-value ratios, acceptable deposit sources, and body corporate considerations. Understanding these differences before you apply will determine whether your application succeeds or stalls halfway through settlement.

Lender Restrictions on Apartments: What Changes

Lenders treat apartments differently because the security includes shared common property and depends on body corporate management. Many lenders cap their loan-to-value ratio at 90% for apartments compared to 95% for houses, meaning you'll need a larger deposit upfront. Some lenders also require a minimum apartment size of 50 square metres or won't lend on properties above a certain floor level in high-rise buildings.

Consider an investor based in Aveley looking to purchase a one-bedroom apartment in a CBD location for rental income. At 80% LVR, the investor would need to provide the deposit plus cover stamp duty and settlement costs separately. If the apartment is smaller than 50 square metres, several major lenders would decline the application regardless of the investor's income or deposit size. The solution involved matching the investor with a lender that accepts smaller apartments and structuring the loan with a slightly higher interest rate to offset the perceived risk.

Interest-Only Repayments Versus Principal and Interest

Interest-only repayments keep your monthly outgoings lower and maximise your cash flow, which is why many property investors choose this option. With an investment loan, you can typically arrange interest-only repayments for up to five years, after which the loan reverts to principal and interest unless you negotiate an extension.

The advantage is that every dollar of interest paid is typically a claimable expense, and your capital remains available for other investments or portfolio growth. The disadvantage is that your loan balance doesn't reduce during the interest-only period, so you're not building equity through repayments. Whether interest-only suits your situation depends on your income, tax position, and whether you plan to hold the property long-term or sell within a few years.

Calculating Rental Income: How Lenders Assess Serviceability

Lenders don't add 100% of the expected rental income to your borrowing capacity. Most lenders apply a shading factor, typically using 80% of the rental income when calculating serviceability. If the apartment generates $500 per week in rent, the lender will only count $400 per week toward your ability to service the loan.

This shading accounts for vacancy periods, maintenance costs, and the possibility that rental income fluctuates. It's one reason why some investors are surprised when their borrowing capacity falls short of what they expected. When structuring an investment property finance application, it's worth knowing the lender's shading percentage upfront and adjusting your purchase budget accordingly.

Body Corporate Fees and Lender Appetite

Body corporate fees don't just affect your cash flow—they also influence which lenders will approve your application. If the body corporate fees exceed a certain percentage of the property's value, some lenders view it as a red flag and may decline the application or reduce the maximum LVR they'll offer.

Lenders are particularly cautious if the body corporate is involved in disputes, if there's a history of special levies, or if the sinking fund balance is low. Before signing a contract, request a copy of the body corporate records and have your broker review them with the lender you're likely to use. If there's an issue, you'll know before you're committed.

Using Equity from Your Aveley Home to Fund the Deposit

Many investors in Aveley use equity from their owner-occupied home to fund the deposit on an investment apartment rather than saving cash separately. This approach is called equity release and allows you to access capital without selling your existing property.

If your Aveley home has increased in value since you purchased it, you may be able to borrow against that equity and use the funds as a deposit for the apartment purchase. The lender will assess your total borrowing across both properties and ensure your income can service both loans, including the shaded rental income from the investment property. Structuring the loans separately—rather than cross-collateralising them—gives you more flexibility if you want to sell or refinance one property later without affecting the other.

Tax Deductions and Claimable Expenses: What Counts

Interest on your investment loan, body corporate fees, council rates, property management fees, landlord insurance, and repairs are all typically claimable expenses. Depreciation on the building and fixtures can also reduce your taxable income, particularly if the apartment was built recently.

From 1 July 2027, new rules will apply to negative gearing and capital gains tax for properties purchased after Budget night in May 2026. If you buy an established apartment after that date, rental losses will only be deductible against rental income or capital gains from residential property, not against your salary. Excess losses can still be carried forward to offset future property income. New apartments remain eligible for the full negative gearing deductions and a choice between the 50% CGT discount or the new inflation-indexed approach. If tax efficiency is a priority, discussing the timing of your purchase with a tax professional is worthwhile.

Choosing Between Variable and Fixed Rates for Investment Loans

Variable rates give you flexibility to make extra repayments, redraw funds, or refinance without penalty. Fixed rates lock in your repayment amount for a set period, which can help with budgeting, but you'll typically face break costs if you want to exit the loan early.

Some investors split their loan between variable and fixed portions to balance certainty with flexibility. Your choice depends on your risk tolerance, how long you plan to hold the property, and what you expect rates to do over the next few years. Most investment loan products allow you to fix a portion while keeping the rest variable, giving you access to offset accounts and the ability to make extra repayments where needed.

Purchasing an apartment as an investment property is a proven way to build wealth and generate passive income, but the financing structure matters as much as the property itself. Call one of our team or book an appointment at a time that works for you.

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