Avoid These 5 Mistakes When Buying Your First Investment

Most First Investors Underestimate How Much They Can Borrow

Lenders assess investment loan serviceability at least 3 percentage points above the actual product rate, and from February this year, most banks cap high debt-to-income lending at 20 per cent of their new investor loan book. Each bank may lend up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater, measured quarterly, and the limit applies to new lending only. If your combined borrowings push you above six times your household income, you may find approval depends on which lender still has capacity in that quarter.

Consider a buyer in Carnegie with household income of $120,000 who already has an owner-occupied mortgage of $450,000. Adding a $400,000 investment loan would bring total debt to $850,000, or just over seven times income. That borrower sits outside the core lending appetite for most banks and will need a broker who monitors quarterly allocation across multiple lenders. Rental income helps, but lenders typically only recognise 70 to 80 per cent of the lease amount when calculating serviceability, and the loan still needs to service at the higher assessment rate.

Choosing Interest-Only Without Understanding the Trade-Off

Interest-only loans and investor loans generally attract higher risk weights than owner-occupied principal-and-interest loans at the same loan-to-valuation ratio under the prudential framework. That means the lender holds more capital against the loan, which flows through to a higher interest rate. An interest-only period reduces your monthly repayment and can improve cash flow when rental income is tight, but you pay more over the life of the loan because the principal does not reduce during that period.

In our experience, investors who choose interest-only purely to maximise negative gearing often regret the decision when the interest-only period expires and the repayment jumps. A principal-and-interest structure may cost more each month, but it builds equity automatically and positions you to refinance or draw down for the next purchase sooner. If cash flow is genuinely constrained, a shorter interest-only term of two or three years, rather than five, keeps your options open without locking in higher pricing for the full term.

Ignoring the 1 July 2027 Tax Changes

From the 2027-28 income year, losses related to established residential investment properties acquired after 7:30pm AEST on 12 May 2026 are deductible only against other income from residential properties, including capital gains on residential properties, and excess losses can be carried forward. If you purchase an established unit in Carnegie after that date, you cannot deduct the loss against your salary unless you already own another rental property with positive income or realise a capital gain on residential property in the same year.

Eligible new builds include dwellings constructed on previously vacant land and dwellings replacing existing properties where the number of dwellings increases. Knock-down rebuilds that do not increase the dwelling count, and substantial renovations, do not qualify. A new townhouse in Carnegie purchased off the plan retains full negative gearing and offers a choice between the existing 50 per cent capital gains discount and the new indexed cost base with a 30 per cent minimum tax rate when you sell. The choice is made at disposal, not at purchase, so you keep the flexibility.

For many Carnegie buyers, the tax treatment alone now justifies the price premium on a new build. The ability to deduct the full loss against wage income, combined with depreciation on plant and equipment and capital works, can turn a marginal investment into a viable one. Established properties acquired after 12 May 2026 and before 1 July 2027 can still be negatively geared under the current rules until 30 June 2027 only, so the transition window has closed for most practical purposes.

Failing to Account for Lenders Mortgage Insurance and Deposit Sources

Lenders mortgage insurance is generally required by banks on residential loans where the loan-to-valuation ratio exceeds 80 per cent, and the premium is a cost borne by the borrower, calculated on a sliding scale based on the loan amount and LVR. On an investment loan, LMI is often higher than on an owner-occupied loan at the same ratio because the lender's risk weight is higher. Some lenders will accept a 90 per cent LVR for investment purchases, but the LMI premium at that level can reach $15,000 to $25,000 depending on the loan amount, and the cost is usually capitalised into the loan rather than paid upfront.

If you are using equity from your owner-occupied property in Carnegie to fund the deposit, the lender will require a valuation of that property and will calculate the available equity at 80 per cent of the valuation, less your existing mortgage balance. A property valued at $900,000 with a $450,000 mortgage gives you $270,000 in accessible equity, which is enough to cover a 20 per cent deposit and settlement costs on a purchase in the mid $600,000 range without triggering LMI on the new loan. Offset account balances do not reduce the loan amount for LVR purposes, so keep genuine savings liquid if you need to demonstrate deposit sufficiency.

Overlooking Rental Vacancy and Holding Costs Specific to Carnegie

Carnegie sits within the Glen Eira local government area and has a vacancy rate that has hovered between 1.5 and 2.5 per cent over the past 18 months, according to SQM Research. The suburb is well serviced by Caulfield and Monash University students, and the Frankston train line and several tram routes make it a strong rental location. However, student leases typically turn over each academic year, and a two-week vacancy between tenants costs you two weeks of interest, body corporate fees if the property is in a complex, and council rates that continue regardless of occupancy.

When calculating borrowing capacity, build in a buffer for at least one month of vacancy per year and budget separately for landlord insurance, property management at around 6 to 8 per cent of rent, and any owners corporation fees. Carnegie has a mix of older unit blocks and newer townhouse developments. Older blocks often have lower body corporate fees but higher maintenance levies when major works arise. Newer complexes have higher quarterly fees but more predictable spending. Both are claimable, but they affect your cash flow and serviceability in different ways, and the lender will include the body corporate fee as an ongoing expense when assessing your application.

Mistaking Pre-Approval for a Locked Rate or Locked Capacity

A pre-approval gives you a borrowing limit based on your current income, liabilities, and the lender's policy at the time of issue. It does not lock your interest rate, and it does not guarantee final approval once you go unconditional on a contract. If the lender changes serviceability policy, or if your circumstances change between pre-approval and formal application, the offer can be withdrawn or reduced. Most pre-approvals are valid for 90 days, and some lenders will extend once, but the extension is not automatic.

If you are buying in Carnegie and expect settlement to fall outside the pre-approval window, speak to your broker before signing the contract. A small change in your employment status, a new car loan, or a rate rise that pushes your assessment rate above the buffer threshold can all reduce your approved amount. We regularly see buyers assume the pre-approval amount is the amount they should offer, when in reality the pre-approval is based on a hypothetical property and does not account for the actual purchase price, actual rental income, or actual strata fees until you provide those details in the full application. Treat the pre-approval as a guide, not a guarantee, and keep your broker informed of any changes in your financial position during the search period.

Call one of our team or book an appointment at a time that works for you. We work with investors across the bayside area and have access to investment loan options from banks and lenders across Australia, including those with higher debt-to-income capacity and investor-specific rate discounts.

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