Eltham's established townhouse stock sits between three-bedroom units at a median of $859,000 and entry-level houses starting around $1,030,000, making them a practical choice for investors who want floor space without house-level capital outlay.
The challenge is that lenders treat townhouses differently to houses in their serviceability calculations. Body corporate fees reduce your borrowing capacity dollar for dollar, and some lenders apply stricter loan-to-value ratios to strata properties than to freestanding homes. The structure you choose for your investment loan will determine how much you can borrow, what deposit you need, and how much of the holding cost you can deduct.
Deposit requirements for townhouse purchases in Eltham
You need at least a 10 per cent deposit to purchase an investment townhouse, but most lenders require 20 per cent to avoid Lenders Mortgage Insurance.
Consider an investor purchasing a two-bedroom townhouse in Eltham at the current median of around $682,500. With a 20 per cent deposit of $136,500, the loan amount is $546,000, and LMI does not apply. If the same investor proceeds with a 10 per cent deposit of $68,250, the loan amount increases to $614,250 and LMI is charged on the amount above 80 per cent loan-to-value ratio. The premium varies by lender but typically ranges from $15,000 to $25,000 for a loan of this size. That premium is capitalised into the loan, increasing the total borrowing to around $630,000 to $640,000.
Some investors choose to pay LMI to preserve cash for renovation or to purchase sooner, particularly if they expect price growth to outpace the cost of the premium. Others prefer to wait and avoid the impost altogether. Neither approach is inherently better, but the decision should be made with reference to your broader portfolio strategy and the opportunity cost of delaying the purchase.
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How body corporate fees affect borrowing capacity
Lenders deduct body corporate fees from your net rental income when calculating serviceability. A townhouse returning $550 per week in rent with quarterly body corporate fees of $1,200 delivers $28,600 gross annually, but the lender assesses net income of $23,800 after deducting $4,800 in strata costs.
If you are buying your first investment property, this adjustment can reduce your maximum borrowing capacity by $40,000 to $60,000 compared to a freestanding house at the same rent. Lenders also apply a serviceability buffer of 3.0 percentage points above the loan product rate under APRA requirements, meaning your repayment capacity is tested at a rate typically 3 percentage points higher than the rate you will actually pay. A borrower with $120,000 in annual income and no other debt might qualify for a loan amount of $650,000 on a house but only $600,000 on a townhouse with $5,000 annual body corporate costs, all else being equal.
In our experience, buyers in Eltham often underestimate this effect until they receive formal pre-approval. The strata fees themselves are fully deductible as an expense, but the reduction in borrowing capacity happens regardless of the tax treatment.
Interest-only versus principal and interest for townhouse loans
Most lenders offer interest-only periods of up to five years on investment loans, and many investors use this structure to maximise cash flow during the early years of ownership.
An interest-only loan of $546,000 at current variable rates costs approximately $2,275 per month in repayments, while a principal and interest loan at the same rate costs approximately $3,050 per month. The difference of $775 per month, or $9,300 annually, can be redirected to other investments, offset against your owner-occupied mortgage, or held as a liquidity buffer. Interest-only loans do not reduce the principal balance, so the total interest paid over the life of the loan is higher if you revert to principal and interest repayments after the interest-only period expires.
For investors focused on building equity through property price growth rather than debt reduction, interest-only structures are common. For those building wealth through forced principal repayment, principal and interest loans are preferred. Under the negative gearing changes that apply from the 2027-28 income year, interest deductions on established residential properties acquired after 12 May 2026 can only be offset against residential property income, not salary or other income. Townhouses purchased before that date, or new builds purchased after it, retain full negative gearing under the grandfathering provisions.
Variable versus fixed rate structuring
Variable rates allow you to make additional repayments without penalty and provide access to offset accounts, which reduce the interest charged on your loan without reducing the deductible interest expense. Fixed rates lock in your repayment amount for a set term, typically one to five years, and protect you from rate increases during that period.
Many investors use a split structure, fixing a portion of the loan to create repayment certainty and leaving the remainder on a variable rate to retain flexibility. A buyer financing a $546,000 townhouse purchase might fix $300,000 at a three-year rate and leave $246,000 on a variable rate with an offset account. The fixed portion provides stable repayments of approximately $1,575 per month, while the variable portion costs approximately $1,025 per month but can be reduced by parking surplus cash in the offset account. If the investor holds $50,000 in offset, the interest charged on the variable portion drops to approximately $850 per month.
Fixed rates do not allow offset accounts, and breaking a fixed rate before the term expires usually incurs break costs. If you are considering refinancing to release equity or selling the property within the fixed term, the break cost can exceed the benefit of the rate lock. Variable rates avoid this impost but expose you to rate movements. Most lenders allow you to fix up to 90 per cent of the loan and leave the remainder variable, giving you the option to weight the split toward stability or flexibility depending on your circumstances.
Leveraging equity from your Eltham home
If you already own a property in Eltham or nearby, you may be able to use the equity in that property to fund part or all of the deposit for your townhouse purchase without selling or refinancing your existing loan.
As an example, an owner-occupier with a house valued at $1,350,000 and an outstanding loan of $600,000 has $750,000 in equity. Most lenders allow you to borrow up to 80 per cent of the property value, or $1,080,000, meaning $480,000 of equity is accessible without incurring LMI. That amount is sufficient to fund the deposit and settlement costs on a townhouse purchase in Eltham, leaving the investor with two properties and a combined loan-to-value ratio below 80 per cent.
The process involves establishing a new split loan or line of credit against the existing property, with the released funds used as the deposit for the investment purchase. The interest on the borrowed deposit is tax-deductible provided the funds are used to acquire an income-producing asset. When you are expanding your property portfolio, this structure allows you to acquire the second property without saving a separate cash deposit, accelerating your entry into the market.
Lenders assess your serviceability based on the combined debt across both properties, so the rental income from the townhouse is included in the calculation. If the townhouse is neutrally geared or positively geared after deductions, it improves your serviceability for future borrowing. If it is negatively geared under the new rules, losses can still be carried forward and offset against future residential property income or capital gains.
Choosing the right lender for townhouse investment loans
Not all lenders assess townhouse applications identically. Some apply a higher interest rate to properties with high body corporate fees, while others reduce the maximum loan-to-value ratio to 75 per cent for strata properties in buildings with more than three levels or shared commercial space.
When you access investment loan options from banks and lenders across Australia, the difference in policy can change your borrowing capacity by $50,000 or more on the same property. One lender might assess a townhouse with $1,500 quarterly body corporate fees at full rental income less the strata cost, while another applies a blanket 20 per cent discount to rental income on all strata properties regardless of fee level. A third lender might not lend on properties in complexes with more than 50 units, or with sinking fund balances below a certain threshold.
We regularly see this create confusion for buyers who receive pre-approval from one lender and then find the loan is declined at formal application because the specific townhouse does not meet that lender's strata criteria. Working with a broker who understands each lender's policy means you can shortlist properties that will be financeable before you make an offer, rather than discovering the issue after you have signed a contract.
If you are an Eltham local looking to purchase an investment townhouse without overcommitting your serviceability or paying for insurance you do not need, call one of our team or book an appointment at a time that works for you. We work with clients across the Shire of Nillumbik and City of Banyule to structure investment loans that align with your broader wealth strategy, not just the property in front of you.
Frequently Asked Questions
What deposit do I need to purchase an investment townhouse in Eltham?
You need at least 10 per cent of the purchase price, but most lenders require 20 per cent to avoid Lenders Mortgage Insurance. A 10 per cent deposit on a $682,500 townhouse is $68,250, but LMI of $15,000 to $25,000 will apply. A 20 per cent deposit of $136,500 avoids LMI entirely.
How do body corporate fees affect my borrowing capacity?
Lenders deduct body corporate fees from your net rental income when assessing serviceability. A townhouse with $1,200 quarterly body corporate fees reduces your assessed income by $4,800 annually, which can lower your maximum borrowing capacity by $40,000 to $60,000 compared to a freestanding house at the same rent.
Should I choose interest-only or principal and interest for my townhouse loan?
Interest-only loans maximise cash flow by reducing monthly repayments, typically by $700 to $900 per month on a $546,000 loan. Principal and interest loans build equity faster but cost more each month. The choice depends on whether you prioritise cash flow or forced debt reduction in your investment strategy.
Can I use equity from my existing Eltham property to buy an investment townhouse?
Yes, if your existing property has sufficient equity. Most lenders allow you to borrow up to 80 per cent of the property value. A house worth $1,350,000 with a $600,000 loan has $480,000 accessible equity, enough to fund the deposit and costs on a townhouse without saving additional cash.
Do all lenders assess townhouse loans the same way?
No. Some lenders reduce borrowing capacity on strata properties or apply stricter loan-to-value ratios, particularly for buildings with high body corporate fees or more than 50 units. Policy differences can change your borrowing capacity by $50,000 or more on the same property.
