When to Choose a Townhouse for Investment Property

Investment Loans for Townhouses: What Changes

Townhouses sit in a different lending category to standalone houses, and that affects deposit size, lender appetite, and borrowing capacity. Most lenders treat townhouses the same way they treat units when assessing risk. If the property shares common property, has body corporate involvement, or is part of a strata plan, it typically attracts a higher risk weighting under the lender's credit policy.

This has practical outcomes. Some lenders reduce borrowing capacity by applying a shading factor to rental income on strata-titled properties, which means you may not be able to borrow as much on a townhouse as you could on a standalone house at the same purchase price. A handful of lenders cap investor lending on properties with four or more dwellings on title, which can rule out some townhouse developments altogether. We regularly see applicants assume a townhouse will be assessed the same way as a house, then discover mid-application that the lender has reclassified it.

Consider a buyer looking at a two-bedroom townhouse in a complex of six. The townhouse is part of a strata plan with shared driveways and a small common area. Three lenders on their shortlist treat it as a standard residential property. Two apply a 20 per cent shading to rental income. One won't lend on the property at all because the complex includes more than four dwellings on a single certificate of title. The difference in borrowing capacity between the first and second group of lenders can be $40,000 to $60,000, depending on the applicant's income and other commitments. Knowing which lenders apply which policy before you make an offer is part of the role we play.

Deposit and LMI Costs for Townhouse Purchases

Most lenders allow up to 90 per cent LVR on investment property purchases, which means a 10 per cent deposit plus costs. On strata-titled townhouses, some lenders reduce that to 85 per cent or 80 per cent LVR depending on the size of the complex, the number of units on title, or the location. If you're planning to borrow above 80 per cent LVR, LMI applies, and the premium increases sharply as the LVR rises.

LMI on investment loans is generally higher than on owner-occupier loans at the same LVR. The insurer is pricing the higher probability of default on investor lending, which has been reflected in claims data over multiple cycles. Stamp duty on the LMI premium may also apply depending on your state, though Western Australia abolished LMI stamp duty in 2019. The upfront cost of LMI can be capitalised into the loan amount, but doing so increases the total amount borrowed and the ongoing interest expense, which reduces your deductible interest and increases the after-tax cost of holding the property.

If you're using a low deposit strategy, make sure the property you're targeting fits within the lender's appetite for strata-titled stock. A 10 per cent deposit on a townhouse in a small, well-maintained complex is usually manageable. A 10 per cent deposit on a townhouse in a complex with 20-plus dwellings, deferred maintenance, or a weak sinking fund may not be.

Interest-Only Lending on Townhouse Investment Loans

Interest-only repayments on investment property loans reduce your monthly cash outflow and maximise tax deductions, because the full loan balance remains deductible for longer. Most lenders offer interest-only periods of up to five years on investment loans, after which the loan reverts to principal and interest unless you apply for an extension.

Lender appetite for interest-only investment lending tightened following APRA guidance issued in 2017 and again during the pandemic, but as at the date of this article, most major lenders have returned to offering interest-only options on standard residential investment loans without additional rate loadings. Some lenders still apply a slightly higher interest rate to interest-only loans compared to principal and interest, particularly on loans above 80 per cent LVR. Others price them the same.

Townhouses don't attract different interest-only treatment compared to houses, provided the security is otherwise acceptable to the lender. The interest-only period is set at application, and you can choose to make principal repayments voluntarily during that period without penalty on most variable rate products. On a fixed rate loan, voluntary principal repayments are usually capped at a set amount per year, typically $10,000 to $30,000 depending on the lender. Going over that limit can trigger break costs.

If you're using interest-only repayments to manage cash flow in the early years, make sure you've modelled what happens when the loan reverts to principal and interest. The repayment increase can be 30 to 40 per cent depending on the interest rate at the time. Some investors extend the interest-only period. Others refinance. Others move onto principal and interest and absorb the higher repayment. The right choice depends on your income, portfolio size, and timeline.

Rental Income and Vacancy Considerations

Lenders assess rental income on investment properties by taking the gross rent, applying a shading factor (typically 80 per cent to account for vacancy, maintenance, and management costs), and then including that net figure in your serviceability calculation. On townhouses, the shading factor can be higher if the lender views the property as higher risk due to strata involvement, building age, or location.

Rental yield on townhouses in Perth varies widely depending on suburb, age, and condition. A three-bedroom townhouse in a northern corridor suburb with strong tenant demand might rent for $550 to $650 per week. The same sized townhouse in an oversupplied precinct closer to the CBD might struggle to hold $500 per week. Vacancy rates also vary. Suburbs with high levels of new townhouse construction can experience extended vacancy periods as supply outpaces tenant demand.

When you apply for an investment loan, the lender will either use the current lease in place (if the property is tenanted) or require a rental appraisal from a licensed property manager. The appraisal needs to be dated within 90 days of application and must show a realistic weekly rent based on comparable properties in the area. Inflated appraisals get picked up during credit assessment and either get shaded further or rejected outright. We work with clients to obtain realistic appraisals before lodgement so there are no surprises during assessment. More detail on how lenders treat rental income is covered in our guide to rental income assessment.

Body Corporate Fees and Lender Serviceability

Body corporate fees on townhouses are treated as an ongoing expense in the lender's serviceability calculation, the same way council rates and insurance are. The fees vary depending on the size of the complex, the level of common property, and whether the body corporate covers building insurance. A small complex with minimal common property might charge $500 to $800 per quarter. A larger complex with a pool, gym, or extensive landscaping might charge $1,500 to $2,500 per quarter.

Higher body corporate fees reduce your borrowing capacity because they increase your total monthly expenses. On a loan serviceability assessment, $2,000 per quarter in body corporate fees equates to roughly $667 per month in outgoings, which is treated the same way as a car loan repayment or any other fixed commitment. If you're already at the upper limit of what you can borrow, high body corporate fees can push the application into a decline.

Some lenders also look at the body corporate's financial health as part of their security assessment. A body corporate with a weak sinking fund, outstanding levies, or a history of special levies can be flagged as higher risk. In some cases, the lender will request a copy of the body corporate records before proceeding with the loan. Properties in complexes with unresolved building defects, cladding issues, or major works planned can be declined outright, regardless of the borrower's financial position.

Fixed Rate vs Variable Rate on Investment Loans

Fixed rate investment loans give you repayment certainty for a set period, typically one to five years, but they come with restrictions on extra repayments and limited offset account functionality. Variable rate loans offer full offset and unlimited extra repayments, but your rate can move up or down depending on the lender's pricing and the broader rate environment.

Most investors choose variable or a split loan structure, where part of the loan is fixed and part is variable. A split gives you some rate protection while maintaining flexibility on the variable portion. The split ratio is up to you, common splits are 50/50, 60/40, or 70/30.

On investment loans, offset accounts are often less valuable than they are on owner-occupier loans because you want to maximise your deductible debt, not reduce it. Every dollar in an offset account reduces the loan balance for interest calculation purposes, which reduces your deductible interest expense. If you're holding cash for future investment purchases, holding it in a separate high-interest savings account rather than an offset can preserve your deductions. We cover offset strategy in more detail in our article on offset accounts for investment loans.

Portfolio Growth and Borrowing Capacity

Once you own one investment property, your ability to borrow for a second depends on how much equity you've built, how much rental income the first property generates, and how much uncommitted income you have left after all loan repayments and living expenses are accounted for. Lenders assess your entire financial position each time you apply, not just the new property in isolation.

Townhouses can work well as a first investment property because they typically require a lower deposit than a house in the same suburb, and they generate rental income from day one. If the property is in an area with strong tenant demand and low vacancy, the rental income helps offset the loan repayment and improves your serviceability for the next purchase. If the property is in an oversupplied area with weak capital growth, it can become a borrowing capacity anchor that makes it harder to add a second property.

Some investors choose to refinance their investment loan after a few years to access equity for the next deposit, particularly if the property has increased in value or if they've paid down some principal. Others use equity from an owner-occupier property to fund the next investment purchase. The structure you use depends on your income, your timeline, and how many properties you plan to hold. We work through those scenarios in our guide to growing a rentvesting portfolio.

Call one of our team or book an appointment at a time that works for you. We work with Perth-based investors purchasing townhouses locally and interstate, and we structure loans to fit your income, deposit, and portfolio plans.

Frequently Asked Questions