Do You Know How Townhouse Strata Affects Your Loan?

Lenders assess investment townhouses differently to houses.

The body corporate, the number of units in the complex, and the way strata fees are structured all influence how much you can borrow and which lenders will compete for your business. Some lenders cap the loan to value ratio at 80 per cent for complexes with certain features, others won't lend at all if there are too few units or too much commercial space. That affects your deposit, your Lenders Mortgage Insurance premium, and the rate you'll be offered.

Why Lenders Care About the Strata Plan

Lenders treat strata title property as higher risk than freehold land because the security includes common property they don't fully control. The body corporate can levy special contributions, defer maintenance, or change rules that affect tenancy appeal. If more than 50 per cent of a complex is tenanted, some lenders classify it as non-standard and either add a rate margin or decline the application. If the complex includes commercial lots, or if there are fewer than six residential units, the list of willing lenders shrinks further.

Consider a buyer looking at a three-bedroom townhouse in a complex of four units, two of which are already rented. One major bank will lend at 90 per cent LVR with mortgage insurance. Another caps the loan at 80 per cent because there are fewer than six units. A third won't lend at all because more than half the complex is tenanted. The difference in deposit requirement between those three outcomes is tens of thousands of dollars, and the buyer won't know which category applies until a broker runs the strata report through each lender's serviceability model.

How Body Corporate Fees Affect Borrowing Capacity

Body corporate fees are treated as a recurring expense and reduce the amount you can borrow, just like rates and insurance. The higher the levy, the lower your borrowing capacity. If the sinking fund balance is low or if the complex has deferred maintenance flagged in the minutes, some lenders add a notional expense buffer or decline the application outright until the body corporate passes a resolution to address it.

A townhouse with quarterly levies of $1,200 reduces your borrowing capacity by around $50,000 to $60,000 compared to a freehold house with no strata fees, depending on your income and other commitments. That margin tightens further if you're borrowing above a debt-to-income ratio of 6 times, because APRA now caps how much of a lender's investor portfolio can sit in that higher-risk band. Strata fees push you closer to that cap and can tip the application into decline if other debts are already present.

Interest Only Repayments and Cash Flow

Most investors buying a townhouse choose interest only repayments for the first few years to keep cash flow manageable and maximise the deductible interest expense. Investment loans structured this way mean your repayments cover only the interest charge, not the principal, so the loan balance doesn't reduce during the interest only period. That frees up cash to cover body corporate fees, vacancy periods, and repairs without dipping into salary.

From 1 July 2027, new negative gearing rules quarantine rental losses on residential properties acquired after 7:30pm AEST on 12 May 2026. Losses can only be offset against other residential rental income or carried forward. They can't be offset against salary or wages. Townhouses that qualify as eligible new builds, meaning they're constructed on previously vacant land or replace existing properties where the number of dwellings increases, are exempt from the quarantine and can still be negatively geared under the old rules. A knock-down rebuild that replaces one townhouse with one townhouse doesn't qualify. A development that replaces one house with three townhouses does.

If you're buying an established townhouse after the cut-off date, the tax benefit of negative gearing disappears unless you have other rental income to absorb the loss. That changes the cash flow equation and makes interest only repayments even more important, because you can't rely on a tax refund to subsidise the holding cost.

Deposit Requirements and LMI for Strata Property

Most lenders will lend up to 90 per cent of the purchase price for an investment townhouse, provided the complex meets their strata criteria. That means a 10 per cent deposit plus Lenders Mortgage Insurance to cover the lender's risk on the portion above 80 per cent LVR. LMI premiums for investment property are higher than for owner-occupied loans, and they increase further if the property is strata title or if you're borrowing above 85 per cent.

Some lenders cap investment lending at 80 per cent LVR for townhouses in complexes with fewer than six units, or where the body corporate has flagged building defects or insufficient sinking fund balance. If that's the case, you'll need a 20 per cent deposit and LMI doesn't apply. The difference in upfront cost between 10 per cent and 20 per cent is significant, so it's worth identifying which lenders accept the complex before you exchange contracts.

If you're using equity from another property as your deposit rather than cash savings, the same LVR caps apply across your total portfolio. Lenders calculate the combined loan to value ratio across all secured properties, so releasing equity to fund a townhouse deposit can push your overall portfolio into a higher risk band and trigger LMI or a rate loading even if each individual loan sits below 80 per cent.

Variable Rate or Fixed Rate for Investment Townhouses

Variable rates let you make extra repayments and access offset accounts, which matters if you're planning to pay down the loan faster or if you want to park rental income in the offset to reduce interest. Fixed rates lock in your repayment for a set term, usually one to five years, but you'll lose access to offset and face break costs if you need to sell or refinance before the fixed term ends.

The tax treatment matters too. Interest on an investment loan is deductible, so the after-tax cost of the rate is lower than the headline figure. If you're on the 37 per cent marginal rate, a variable rate of 6.5 per cent costs you 4.1 per cent after tax. A fixed rate of 6.2 per cent costs you 3.9 per cent. The difference is small, and you're giving up flexibility for a saving that might not survive the first rate cut.

Splitting the loan, with part variable and part fixed, is common but adds complexity. You'll have two loan accounts, two sets of fees, and two offset accounts if the lender permits offset on the variable portion. Most investors stick with variable unless they're certain they won't sell or refinance within the fixed term.

How Rental Income Is Assessed by Lenders

Lenders include rental income in your serviceability assessment, but they don't use the full amount. Most lenders shade the rent by 20 per cent to account for vacancy, maintenance, and periods between tenants. If the townhouse rents for $600 per week, the lender will assess it as $480 per week of usable income. Some lenders shade by 25 per cent for investment properties, others use 20 per cent but apply a higher expense buffer if the vacancy rate in the suburb is above a certain threshold.

If you don't have a signed lease in place at the time of application, the lender will rely on a rental appraisal from a licensed property manager. The appraisal needs to be current, usually no older than 90 days, and it must specify a weekly rental range. Lenders take the lower end of the range and then apply the shading. If the property manager estimates $580 to $620 per week, the lender uses $580, shades it to $464, and that's the income they'll count toward your borrowing capacity.

For a detailed look at how different loan structures work, including interest only options and offset accounts, refer to the investment loans overview.

CGT and the New Indexation Rules for Investors

From 1 July 2027, the 50 per cent capital gains tax discount for individuals is replaced with cost base indexation using the Consumer Price Index and a minimum 30 per cent tax rate on real capital gains. The change applies only to gains accruing after 1 July 2027, so if you buy a townhouse now and sell it in ten years, the gain up to 30 June 2027 is still eligible for the 50 per cent discount and the gain after that date is subject to the new indexation and minimum tax.

Eligible new build residential properties get an election between the 50 per cent discount and indexation with the 30 per cent minimum tax, so if you're buying a new townhouse in a development that increases the dwelling count, you keep the option to use the old rules. If you're buying an established townhouse, you don't.

The minimum tax exemption applies to recipients of means-tested income support payments in the financial year they receive the payment, but most property investors won't qualify. The practical effect is that holding an established investment townhouse for the long term is now less tax-effective than it was, unless you're in a lower marginal tax bracket or the property qualifies as a new build.

Refinancing Investment Townhouses After Settlement

Once your loan settles, the lender you used for purchase isn't locked in. If your circumstances improve, if rates drop, or if another lender offers a sharper discount, you can refinance to a new loan without selling the property. Refinancing an investment townhouse follows the same process as refinancing a house, but the strata report is reassessed and any changes to body corporate fees, sinking fund balance, or tenancy mix since you purchased can affect the new lender's appetite.

If the body corporate has increased levies or if a special levy has been passed to fund major works, your borrowing capacity may be lower than it was at purchase. If the complex now has more than 50 per cent tenanted lots, some lenders will decline. If you've built equity through capital growth or loan repayments, you might be able to release that equity to fund another purchase, but the same LVR caps and serviceability buffers apply.

Refinancing makes sense when the rate saving exceeds the cost of discharge fees, application fees, and valuation fees. For an investment loan, the interest saving is worth more because it's deductible, so even a 0.2 per cent rate reduction can justify the switch if the loan balance is high enough.

Investment lending rules change quickly, lenders adjust their strata criteria without warning, and the tax law has just shifted in a way that changes the return profile for most established residential property. Get your structure and your lender choice right at the start, because fixing it later costs time and money.

Call one of our team or book an appointment at a time that works for you.

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