The Easiest Way to Finance an Investment Townhouse

Buying a townhouse as an investment in Kogarah gives you a property that sits somewhere between a unit and a house in terms of price, maintenance responsibility and tenant appeal.

The way lenders assess your investment loan application for a townhouse will depend on whether they treat it as a standard residential property or flag it for extra scrutiny because of body corporate involvement, shared access or smaller lot sizes. Most townhouses in Kogarah are assessed like houses, but knowing where the lender draws the line can save weeks in the approval process.

Medical professionals working locally at St George Hospital or nearby private practices often look to Kogarah for both proximity to work and rental demand from colleagues and students. The suburb sits close enough to the city to attract tenants who want transport links without paying inner-city rents.

How Lenders Classify Townhouses for Investment Lending

A townhouse with its own land title and no shared common property is generally treated as a standard dwelling by most lenders. When the townhouse is part of a strata scheme with shared driveways, walls or facilities, lenders will want to see the strata report and may adjust the loan-to-value ratio they are prepared to offer.

Consider a buyer looking at a two-bedroom townhouse in Kogarah with community title. The lender asks for the strata search and sees that the sinking fund is low and a roof replacement is flagged within two years. That lender might cap the loan at 80 per cent of the purchase price even though the buyer has enough deposit for 85 per cent, or they may decline altogether if the body corporate finances look unstable. Another lender may not have the same concern if the total number of lots in the scheme is small and recent levies have been paid on time.

This is why the structure of the townhouse ownership matters as much as the property itself when you are arranging finance.

Deposit and Borrowing Settings Under Current Lending Rules

Investment loans sit under a separate debt-to-income cap that lenders must observe. Since February, lenders have been limited in how much they can lend to investors with total debt six times their income or higher. That does not mean you cannot borrow at that level, but it does mean the lender has a quota and may be more selective about which applications they approve when that quota fills up.

Lenders also assess your ability to service the loan at a rate that is three percentage points above the actual loan rate. If the variable rate on offer is 6.5 per cent, the lender tests whether you could still afford repayments if the rate were 9.5 per cent. That buffer has been in place since late 2021 and continues to tighten how much investors can borrow compared to a few years ago.

You will generally need at least a 10 per cent deposit plus costs to avoid a decline, and a 20 per cent deposit to avoid paying for Lenders Mortgage Insurance. Some lenders will go to 90 per cent of the property value if you can show strong income and low existing debt, but that is less common now than it was before the current serviceability settings came in.

Interest Rate Structure and Repayment Type

Most investors choose a variable rate on an interest-only basis for the first few years. Interest-only keeps your repayments lower and preserves cash flow, which matters when you are holding a property for income and long-term capital growth rather than paying it off quickly.

Fixed rates give certainty but lock you in. If you want to sell or refinance before the fixed term ends, break costs can run into thousands of dollars depending on how far rates have moved since you locked in. For an investment property where your plans might shift with changes to tenancy, work location or portfolio strategy, a variable rate gives you more room to move.

You can split the loan between fixed and variable if you want some certainty on part of the debt while keeping the rest flexible. That approach works well when rates are sitting at levels you are comfortable with but you are not sure where they will be in two years.

Body Corporate Costs and How They Affect Borrowing Capacity

When a lender assesses how much you can borrow for a townhouse with a body corporate, they include the quarterly levy as an ongoing expense that reduces your surplus income. A levy of $1,200 per quarter is nearly $5,000 a year that sits alongside the loan repayments, council rates, landlord insurance and property management fees.

In our experience, buyers underestimate how much the levy reduces their borrowing capacity. If you are already close to the serviceability buffer, a high levy can be the difference between approval at the amount you need and a lower pre-approval that does not cover the property you want to buy.

Townhouses in Kogarah typically have lower levies than units in larger complexes because there are fewer shared facilities. A small scheme with six or eight townhouses and a shared driveway might charge $800 to $1,200 per quarter. A scheme with a pool, gym or lift will charge more, and lenders will count every dollar of it when they calculate what you can afford.

Rental Income and How It Is Assessed

Lenders will include rental income in your serviceability assessment, but they do not count every dollar. Most lenders apply a shading factor, which means they only use 80 per cent of the expected rent when they calculate your income. Some lenders are more conservative and use 70 per cent.

If a two-bedroom townhouse in Kogarah rents for $650 per week, the lender might only count $520 per week in your favour when they assess the loan. They also build in an assumption that the property will sit vacant for a period each year, even if you expect to keep it tenanted continuously.

This shading is one reason why investors often cannot borrow as much as they expect based on the rental return alone. The loan still needs to be serviceable from your other income, especially in the early years when you are carrying holding costs and the rent is not enough to cover everything.

Why the Apportionment Between Land and Improvements Matters

When you settle on a townhouse, your conveyancer will provide a contract that shows how much of the purchase price is attributed to the land and how much to the building. That split matters for depreciation.

You can claim depreciation on the building and the fixtures inside it, but not on the land. For a townhouse built in the last 10 to 15 years, depreciation can add several thousand dollars a year to your deductions, reducing the taxable income from the property and lowering how much you are out of pocket each year.

If the townhouse was built before 1985, or if it has been substantially renovated by a previous owner who claimed all the available depreciation, your deductions will be lower. A quantity surveyor can prepare a depreciation schedule that sets out exactly what you can claim, and the cost of that report is also deductible.

Changes to Negative Gearing Rules and What They Mean for Townhouses Purchased Now

Properties purchased before mid-May are still fully negatively geared, which means any loss you make on the investment can be deducted against your salary or other income. Properties purchased after that date are subject to new rules that start applying from the 2027-28 tax year.

Under the new rules, losses on established investment properties can only be offset against income from other residential properties. If you only own one investment property and it runs at a loss, that loss is quarantined and carried forward until you sell the property or earn income from another residential investment.

New builds are exempt. If the townhouse you are buying was constructed on previously vacant land or is part of a development where the number of dwellings increased, the old negative gearing treatment continues to apply. That exemption is one reason why new townhouse developments in areas like Kogarah and surrounds are attracting more investor interest now than they did 12 months ago.

If you are weighing up an established townhouse versus a new one, the tax treatment over the next few years is worth factoring into your numbers, particularly if you are in a higher tax bracket and were relying on the loss to reduce your overall tax.

Kogarah's Rental Market and Tenant Profile

Kogarah sits on the Illawarra train line and has direct access to the city, the airport and the southeastern suburbs. St George Hospital is the largest employer in the area, and the surrounding streets are full of medical centres, pathology labs and allied health practices. That makes the suburb a consistent draw for healthcare workers looking to rent close to work.

The other tenant group is young professionals and couples who want something more spacious than a unit but cannot yet afford to buy a house. A two-bedroom townhouse with a courtyard and a car space will generally rent faster than a similar unit in a large block, and tenants tend to stay longer when they have a bit more room and some outdoor space.

Vacancy rates in the St George area have been low for the last few years, which means well-presented townhouses in Kogarah typically find tenants within a few weeks of listing. That does not mean you should skip budgeting for vacancy, but it does mean the risk is lower here than in suburbs further out where tenant demand is thinner.

Call one of our team or book an appointment at a time that works for you. We will look at your borrowing capacity, work out which lenders are the right fit for the type of townhouse you are buying, and make sure the structure of your investment loan lines up with where you are headed.

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