Avoid these 5 mistakes when buying an investment unit

Underestimating how much you need beyond the deposit

You'll need to cover more than just the deposit when buying an investment unit. Stamp duty, body corporate fees, legal costs, and potentially Lenders Mortgage Insurance (LMI) all sit outside your deposit amount.

Consider a buyer looking at a two-bedroom unit in Heidelberg, close to Austin Hospital or the railway station. Beyond the deposit itself, stamp duty in Victoria applies to investment purchases at the standard rate without the concessions available to first home buyers. Legal fees typically run between $1,500 and $2,500 for a standard unit purchase. If your deposit sits below 20 per cent of the purchase price, LMI becomes payable, and the premium rises sharply as your loan-to-value ratio increases. A unit with shared walls or common property also involves body corporate fees, often between $2,000 and $5,000 annually depending on the building's facilities and age. These fees are factored into your serviceability assessment but paid from your own funds at settlement or quarterly thereafter.

Another layer involves rental income assumptions. Lenders typically assess rental income at 80 per cent of the expected market rent to account for vacancy periods and maintenance costs. That means a unit returning $450 per week in rent will only be credited as $360 per week when calculating your borrowing capacity. If you've budgeted based on full rental income, the shortfall can reduce what you're approved to borrow by tens of thousands of dollars.

Choosing interest-only without understanding the trade-off

Interest-only repayments reduce your monthly outgoings and may suit investors seeking to maximise cashflow or negative gearing benefits in the early years. Most lenders offer interest-only periods up to five years on investment loans, after which the loan reverts to principal and interest repayments.

The challenge comes when the interest-only period ends. Monthly repayments can jump by 30 to 40 per cent once principal repayments begin, particularly if interest rates have risen in the meantime. In our experience, investors who select interest-only without planning for that transition often find themselves needing to refinance or sell when the reversion happens. The principal balance remains unchanged throughout the interest-only period, which means you're not reducing debt or building equity through repayments during that time. Equity growth depends entirely on property value increases.

Overlooking how serviceability buffers affect borrowing capacity

Lenders assess your ability to service an investment loan at an interest rate at least 3.0 percentage points above the actual loan product rate. That buffer has been in place since October 2021 and applies to all new borrowers with banks and regulated lenders.

If you're offered a variable rate of 6.2 per cent on an investment loan, the lender will assess whether you can afford repayments at 9.2 per cent or higher. For a $500,000 loan over 30 years, that's the difference between monthly repayments of around $3,050 and $4,030 under the serviceability test. The buffer exists to ensure you can still meet your obligations if rates rise, but it also constrains how much you can borrow. Investors with multiple income sources, including rental income from other properties, may face additional haircuts where that income is discounted or excluded entirely depending on the lender's policy.

From February this year, lenders can approve no more than 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. If your total borrowings across all loans, including your home loan and the new investment loan, exceed six times your gross annual income, you may find yourself in the portion of applications subject to stricter scrutiny or lower approval rates. Running your numbers through a borrowing capacity assessment before you start looking at properties helps you understand where you sit.

Picking a unit in a building with planning or structural issues

A unit's value and rental appeal can be undermined by defects, cladding issues, or unresolved body corporate disputes. Heidelberg has a mix of older low-rise blocks and more recent developments near the station and Burgundy Street, and each comes with its own risk profile.

Before making an offer, request a copy of the body corporate records, including meeting minutes, financial statements, and any ongoing or planned special levies. Buildings with combustible cladding or water ingress problems often face special levies running into the tens of thousands per unit to fund remediation. Those levies are your responsibility as the owner, and they can arrive with little warning if the body corporate votes to proceed with works. Lenders may also apply stricter loan-to-value limits or decline to lend altogether on units in buildings with known defects or unresolved safety issues.

A building insurance policy that excludes certain risks, or a body corporate with insufficient sinking fund reserves, should prompt further investigation. Units in buildings with fewer than four storeys and older construction are generally lower risk from a cladding perspective, but age brings its own maintenance concerns. Concrete cancer, lift replacements, and roof repairs can all trigger levies that erode your rental yield.

Assuming all lenders treat units the same way

Not all lenders apply the same loan-to-value limits, interest rate pricing, or serviceability policies to units. Some lenders cap their exposure to high-density postcodes or apply lower maximum LVRs to units in buildings above a certain number of storeys. Others exclude studio apartments or units with a floor area below 50 square metres.

Heidelberg sits in the 3084 postcode, which includes a mix of unit stock from older walk-up blocks to newer apartments closer to the railway line and the revitalised Olympic Village precinct. A lender that applies a blanket 80 per cent LVR cap to units in buildings over three storeys will force you to find a larger deposit or pay LMI, even if your financial position would otherwise support a 90 per cent loan. Other lenders may treat the same unit as lower risk and offer more flexible terms.

Interest rate discounts also vary. A lender offering a 0.6 per cent discount on owner-occupied home loans may only extend a 0.3 per cent discount on investment loans, or apply different discounts depending on whether you're borrowing on a principal and interest or interest-only basis. Working with a mortgage broker in Heidelberg gives you access to multiple lender policies without needing to apply to each one individually. We regularly see rate differences of 0.4 to 0.7 per cent between lenders for the same borrower and property, which can mean thousands of dollars in interest over the life of the loan.

Call one of our team or book an appointment at a time that works for you. We'll run your situation through the lenders most likely to support your purchase and help you avoid the mistakes that cost other investors time and money.

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