Avoid These 7 Mistakes When Buying Investment Property

Established property in Oakleigh South remains a focus for Melbourne investors targeting stable rental demand and proximity to Monash Medical Centre, Chadstone Shopping Centre, and the upgraded Huntingdale station precinct. The cost to finance that purchase has changed.

From 1 July 2027, negative gearing rules shift for properties purchased after 12 May 2026. Rental losses on established dwellings acquired from that date will be quarantined and cannot offset salary or wage income. Those losses can only be used against other residential rental income or carried forward. If you exchanged contracts before 7:30pm AEST on 12 May 2026, the old rules apply indefinitely. If you settled after that date, your loan structure and repayment type affect whether you generate deductible losses and where you can apply them.

Choosing Interest-Only Because It Feels Safer

Interest-only repayments lower monthly outgoings during the interest-only period, but they do not reduce the debt. Many investors choose this option assuming it maximises cash flow and deductions. Under the revised negative gearing framework, a quarantined loss remains quarantined regardless of whether you pay interest only or principal and interest. The question becomes whether you want to carry a larger debt balance into a period where you cannot offset the loss against other income.

Consider an investor who purchases a two-bedroom unit in Oakleigh South in August 2026. Rental income covers 85 per cent of the interest cost. The investor selects a five-year interest-only term to preserve capital for other opportunities. By 1 July 2027, rental losses become quarantined. At the end of the interest-only period, the loan reverts to principal and interest, repayments increase, and the debt has not reduced. The accumulated quarantined losses sit on the tax return, waiting for future rental income or a capital gain. Had the investor structured the loan as principal and interest from the outset, the debt would have reduced by tens of thousands of dollars over five years, and the interest portion of each repayment would have declined, narrowing the rental shortfall over time.

Interest-only investment loans suit scenarios where rental income covers the interest expense or where the investor expects income to rise within the interest-only term. Where rental income does not cover interest and the loss cannot offset salary, paying down the loan becomes the faster path to positive cash flow.

Ignoring the Debt-to-Income Cap When Structuring Borrowing

From 1 February 2026, lenders operate under a debt-to-income cap set by APRA. Each lender may allocate up to 20 per cent of new investor lending to borrowers with total debt of six times gross annual income or more. If your household income is $120,000, the threshold sits at $720,000 in total debt across all loans, including existing owner-occupied debt, investment debt, car loans and other personal lending.

Many investors assume borrowing capacity depends only on income, expenses and the serviceability buffer. The DTI cap applies before the serviceability test. If your total debt exceeds six times income, you fall into the lender's 20 per cent allocation bucket. If that bucket is full, the lender declines the application or offers a lower amount, regardless of whether you can service the repayments. Borrowers with multiple properties or large owner-occupied debt reach the cap sooner.

In a scenario where an Oakleigh South investor holds an owner-occupied loan of $550,000 and seeks an investment loan of $450,000, total debt reaches $1 million. With household income of $150,000, the DTI ratio is 6.67. The application falls into the capped cohort. Some lenders exhaust their allocation early in each quarter. Others reserve capacity for specific customer segments. The outcome depends on timing, the lender's portfolio position, and whether the borrower can increase the deposit to lower the amount borrowed.

Assuming Rental Income Is Assessed at 100 Per Cent

Lenders assess rental income at 70 to 80 per cent of the lease amount to account for vacancy, maintenance, and management costs. If the property rents for $500 per week, the lender uses $350 to $400 per week in the serviceability calculation. This reduction applies even when the property has a tenant in place and no vacancy history.

The assessment percentage varies by lender. Some use 75 per cent across all applications. Others apply 80 per cent when the borrower provides a signed lease and the property is tenanted at the time of application. The difference affects how much you can borrow and whether the loan services within the buffer. An investor assuming full rental income is counted may seek a loan that cannot be approved at the amount required.

When purchasing established property in Oakleigh South, where three-bedroom homes attract families seeking proximity to Monash University and local schools, lease terms tend to be longer than in transient markets. A signed 12-month lease at the time of application supports the higher assessment rate. Purchasing a vacant property or relying on a rental appraisal alone results in the lower rate being applied.

Overlooking Lenders Mortgage Insurance When the Deposit Sits Below 20 Per Cent

Borrowing above 80 per cent of the property value triggers Lenders Mortgage Insurance. LMI protects the lender if the borrower defaults and the sale proceeds do not cover the debt. The premium is paid by the borrower, either upfront or capitalised into the loan. LMI on investment loans costs more than on owner-occupied loans because the lender's risk is higher.

LMI premiums scale with the loan-to-value ratio. At 85 per cent LVR, the premium may sit between 1.5 and 2.5 per cent of the loan amount. At 90 per cent LVR, the premium can reach 3 to 5 per cent. A loan of $600,000 at 90 per cent LVR may attract an LMI premium of $18,000 to $30,000, depending on the lender's insurer and postcode risk rating. That cost is not tax-deductible in the year it is paid. It is claimed over five years or over the life of the loan, depending on how the borrower structures the deduction.

Investors sometimes capitalise LMI into the loan to preserve cash for settlement costs and working capital. Capitalising the premium increases the loan balance and the interest paid over the life of the loan. It also increases the debt-to-income ratio, which may affect future borrowing capacity. If the deposit can be increased to 20 per cent or more, LMI is avoided entirely.

Failing to Account for Body Corporate Fees in Serviceability

Units and townhouses in Oakleigh South typically incur body corporate fees, which range from $1,000 to $4,000 per year depending on the size of the complex and the shared facilities. Lenders include these fees in the expense side of the serviceability assessment. A borrower who does not account for body corporate fees when estimating borrowing capacity may apply for a loan that cannot be serviced once the lender adds the fee to the assessment.

Body corporate fees are deductible against rental income, but the lender treats them as an expense that reduces cash flow. If the annual fee is $3,000, the lender adds approximately $58 per week to the expense calculation. Combined with the vacancy reduction applied to rental income, the net rental position used in serviceability is lower than many investors expect.

Strata reports provided during due diligence disclose the current fee and any planned special levies. Investors should obtain the strata report before finalising the loan application so the correct amount is used in the assessment. A special levy for building remediation or common area upgrades can add thousands of dollars to the annual cost and may affect whether the loan is approved at the requested amount.

Mixing Loan Purposes Without Separate Splits

Investors often use equity from an existing property to fund the deposit and costs for the investment purchase. Releasing equity involves increasing the loan on the existing property, moving cash to the buyer, and then settling the investment property with a separate loan. If the increased loan on the existing owner-occupied property is used to fund the investment purchase, the interest on that increase is deductible because the purpose is investment. If the same loan is later used for private purposes, such as renovating the family home, the interest deductibility is diluted.

The Australian Taxation Office applies the purpose test at the time the funds are drawn. Mixing purposes within a single loan split makes it difficult to separate deductible interest from non-deductible interest. Structuring the loans with separate splits for each purpose preserves clarity. The increased loan on the owner-occupied property sits in one split and is used only for the investment deposit. The investment property loan sits in another split. Any future draw for private purposes sits in a third split.

When refinancing or restructuring investment loans, maintaining separate splits ensures the interest deduction is not challenged during an audit. Records should show the purpose of each draw, the date the funds were advanced, and how the funds were applied.

Locking a Fixed Rate Without Understanding Break Costs

Fixed rates provide certainty during the fixed period but limit flexibility if circumstances change. Break costs apply when a borrower repays a fixed loan early, refinances, or makes a lump sum payment above the allowable threshold. The break cost is calculated based on the difference between the fixed rate on the loan and the wholesale rate the lender can earn by re-investing the funds for the remaining fixed term. When wholesale rates fall below the fixed rate, the break cost increases.

Investors who fix rates at the top of a rate cycle and then seek to refinance when rates fall often face break costs in the tens of thousands of dollars. A loan of $500,000 fixed at 6.2 per cent with three years remaining may incur a break cost of $15,000 to $25,000 if wholesale rates drop to 4.5 per cent. The break cost is not deductible as a standalone expense. It may be deductible if incurred to refinance for income-producing purposes, but the deduction is spread over the remaining term of the original fixed period or five years, whichever is shorter.

Some lenders allow partial fixes or splits between variable and fixed rates. Splitting the loan provides flexibility to repay or refinance part of the debt without incurring break costs on the entire balance. Investors anticipating changes in income, employment, or portfolio strategy should structure the loan with a variable component to preserve options.

The revised negative gearing rules, the DTI cap, and the rental income assessment method all affect how much you can borrow and whether the loan delivers the tax outcome you expect. Established property in Oakleigh South offers rental stability and capital growth potential, but the financing must be structured to support the investment through both the accumulation phase and the eventual transition to positive cash flow. Law Home Loans holds an Australian Credit Licence and provides access to investment loan products from lenders across the panel, including those with higher rental income assessments, flexible split structures, and serviceability overlays that account for quarantined losses.

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