Building wealth through property starts with your first investment loan, and getting the structure right from the outset determines how much equity you can leverage down the track.
Why Lenders Assess Investment Loans Differently
Lenders assess investment loans more conservatively than owner-occupier lending because they price in vacancy risk and the chance you might struggle to service the debt if the property sits empty. They'll typically shade your rental income by 20% when calculating serviceability, meaning they'll only count 80% of the expected rent in their assessment. If a two-bedroom apartment in South Melbourne can realistically achieve $650 per week, the lender's calculator will use $520. That discount compounds when you're relying on rental income to support borrowing power, particularly if you're still carrying rent or a mortgage on your own residence. Most lenders will also assess your loan repayments at a higher buffer rate than the actual interest rate you'll pay, adding another layer of conservatism that shrinks how much you can borrow compared to an owner-occupier loan of the same size.
Deposit and LMI: What You'll Actually Need Upfront
You'll need a minimum 10% deposit plus costs to secure most investment loan options, though some lenders will go to 90% loan to value ratio if you're prepared to pay Lenders Mortgage Insurance. At 90% LVR, LMI can add $10,000 to $20,000 to the amount you're capitalising into the loan, depending on the purchase price and lender. Stamp duty in Victoria isn't waivable for investment purchases the way it is for first home buyers, so you're paying full freight regardless of price. Factor in conveyancing, building and pest inspections, and any immediate repairs or strata arrears, and you're looking at another few thousand on top of the deposit itself. If you already own your own home and have built up equity, you may be able to leverage that equity rather than fronting cash. Lenders will typically let you borrow against up to 80% of your home's value, meaning if your property is worth $800,000 and you owe $400,000, you've got $240,000 in usable equity before hitting that ceiling.
Interest Only vs Principal and Interest: Which Structure Makes Sense
Interest only loans let you pay only the interest portion for a set period, usually up to five years, which keeps your repayments lower and maximises your tax deduction because you're not reducing the deductible debt. Principal and interest repayments mean you're gradually paying down the loan, building equity faster but claiming a slightly smaller deduction each year as the interest portion shrinks. For a first investment property, interest only often makes more sense if you're planning to use future equity to buy additional properties or if cash flow is already stretched across your own mortgage and the new loan. The risk is that when the interest only period ends, your repayments will jump significantly because you'll be paying both principal and interest over a shorter remaining term. In our experience, buyers who plan to hold long term and aren't chasing portfolio growth often prefer principal and interest from the start because it removes the refinancing requirement down the track and gives them a clear paydown timeline.
How the 2027 CGT and Negative Gearing Changes Affect Your First Purchase
From 1 July 2027, established residential properties purchased after 12 May 2026 will no longer qualify for the 50% capital gains tax discount or full negative gearing deductions against wage income. Instead, you'll pay tax on inflation-adjusted gains with a 30% minimum rate, and any rental loss can only be offset against future property income, not your salary. If you're buying an apartment in South Melbourne's Emerald Hill precinct or a Victorian-era conversion near Clarendon Street, that's an established property and the new rules will apply. If you're buying a new build or off-the-plan apartment in Southbank or one of the new developments near the light rail corridor, you'll be able to choose between the old 50% discount and the new indexed method, whichever works in your favour. The negative gearing restriction doesn't kill the tax benefit entirely because losses carry forward, but it does mean you won't see an immediate reduction in your annual tax bill the way investors have traditionally banked on. That changes the cash flow equation for buyers who were relying on a tax refund each year to help cover the shortfall between rent and repayments.
Serviceability When You're Still Paying Rent or Your Own Mortgage
If you're renting in South Melbourne while trying to buy your first investment property, lenders will include your current rent as an ongoing expense when they assess serviceability, even though you'll still be paying it after settlement. That can create a borrowing capacity pinch that wouldn't exist if you already owned your home outright. Consider a buyer earning $120,000 who pays $2,400 per month in rent and wants to borrow for an investment property returning $2,400 per month in rent. The lender will shade that rental income to $1,920, count the full $2,400 rent as an expense, and assess the investment loan repayments at a buffer rate around 3% above the actual rate. The net effect is that the buyer is being assessed as though they're carrying three separate housing costs simultaneously, which is why many first-time investors find their borrowing capacity falls well short of what they assumed. If you already own your home, the lender will typically disregard your current mortgage repayments on your own property if you can show it's fully offset or if you're planning to rent it out, but policies vary between lenders and it's worth structuring the application with someone who knows which ones will give you credit.
Choosing Between Variable and Fixed Rates for Investment Lending
Variable rates give you flexibility to make extra repayments, redraw funds, and refinance without break costs, which matters if you're planning to access equity within a few years to fund your next purchase. Fixed rates lock in your repayment amount and protect you against rate rises, but they come with restrictions on extra repayments and can trigger significant break costs if you need to refinance or sell before the fixed term ends. For investment lending specifically, most investors lean toward variable or a partial fix because the ability to redraw and restructure as your portfolio grows outweighs the certainty of a fixed repayment. If cash flow is already tight and you need predictable costs for the next few years, fixing a portion of the loan while leaving the rest variable gives you some protection without locking yourself in completely. At current variable rates, the difference in repayments between a $500,000 interest only loan at 6.2% versus 6.5% is around $125 per month, which is material if you're already running a monthly shortfall between rent and costs.
What South Melbourne's Rental Market Means for Your Loan Structure
South Melbourne sits inside the 3205 postcode, covering everything from the Emerald Hill heritage precinct through to the light industrial conversions near Clarendon Street and the higher-density blocks closer to the CBD fringe. Rental demand stays consistently firm because of the location between the city, St Kilda Road office corridor, and the Bay Street retail and hospitality strip, but vacancy rates for one and two-bedroom apartments can spike when new supply hits the market in nearby Southbank. Lenders are aware of this and some will apply stricter shading to rental income for apartments in postcodes they consider oversupplied, even if your specific property is a well-located Victorian conversion rather than a newer high-rise. The difference between a lender shading your rent by 20% versus 25% might only be $60 per month on paper, but it can reduce your borrowing capacity by $30,000 or more depending on your income and other commitments. The unit mix and body corporate spending matter too, because lenders will add your quarterly body corporate fees into the serviceability assessment as a non-negotiable outgoing, and a building with high fees or a history of special levies can push your application over the edge if you're already borrowing close to your limit.
Call one of our team or book an appointment at a time that works for you to discuss your investment loan application and structure your first property purchase in a way that sets you up for the next one.
Frequently Asked Questions
How much deposit do I need for my first investment property?
You'll need a minimum 10% deposit plus costs, though some lenders will lend at 90% LVR if you pay Lenders Mortgage Insurance. If you own your own home, you may be able to use equity instead of cash for the deposit.
Why do lenders only count 80% of rental income?
Lenders shade rental income by 20% to account for vacancy risk and the possibility the property might sit empty for periods. This shading directly reduces your borrowing capacity compared to what the actual rent would support.
Should I choose interest only or principal and interest for my first investment loan?
Interest only keeps repayments lower and maximises your tax deduction, which works well if you're planning to buy more properties using equity. Principal and interest builds equity faster but increases your monthly repayments and gradually reduces your deductible interest over time.
How do the 2027 tax changes affect my first investment property purchase?
If you buy an established property after 12 May 2026, you'll lose the 50% CGT discount and won't be able to offset rental losses against wage income from 1 July 2027. New builds remain incentivised and let you choose the most favourable tax treatment.
Can I borrow for an investment property if I'm still renting?
Yes, but lenders will count your rent as an ongoing expense when assessing serviceability, which can significantly reduce your borrowing capacity. This creates a tighter lending scenario than if you already owned your own home outright.
