The number one mistake first-time property investors make isn’t buying the wrong property. It’s starting with the wrong finance structure — or worse, starting with no pre-approval at all and missing a property they wanted because they weren’t ready to move.
Let’s fix that.
Step 1: Understand Your Borrowing Capacity
Your borrowing capacity is the maximum amount a lender will loan you based on your income, expenses, existing debts, and the deposit you have available. Australian lenders are regulated by APRA and must assess your ability to repay at a 3% serviceability buffer above the current rate.
Use a borrowing capacity calculator as a starting point, but speak to a mortgage broker for an accurate assessment — calculators don’t account for lender-specific policies around rental income, existing debts, or employment type.
Step 2: Choose Between Interest-Only and Principal & Interest
Most property investors choose interest-only (IO) loans for their investment properties, at least initially. Here’s why:
- Lower repayments free up cash flow for other investments or living expenses
- The interest on an investment loan is generally tax-deductible in Australia
- Capital growth (not debt repayment) is the primary wealth-building mechanism for most investors
IO periods are typically 5 years, after which the loan reverts to principal and interest. Plan for this transition in your cash flow modelling.
Step 3: Understand the Deposit Requirements
For an investment property, most lenders require a minimum 20% deposit to avoid paying Lenders Mortgage Insurance (LMI). LMI protects the lender, not you — it’s an additional cost that can run into tens of thousands of dollars.
Some investors use equity from their existing home as a deposit — this is called cross-collateralisation and has pros and cons worth discussing with your broker.
Step 4: Get Pre-Approval Before You Look
Pre-approval (also called conditional approval) means a lender has assessed your financial situation and confirmed in principle that they’ll lend you a specified amount. In competitive markets, having pre-approval means you can make an offer or register for an auction with confidence.
Pre-approval typically lasts 90 days. Don’t apply for multiple pre-approvals simultaneously — each application leaves a credit inquiry on your file, which can affect your credit score.
Step 5: Factor in All the Costs
The purchase price is only part of what you’ll pay. Budget for:
- Stamp duty — varies by state and purchase price. Use your state revenue office calculator.
- Conveyancing fees — typically $1,000–$2,500
- Building and pest inspection — $400–$800
- Loan establishment fees — $0–$1,000 depending on lender
- Property management fees — 7–10% of rental income ongoing
- Land tax — applies in most states above a certain threshold
See also: Fixed vs variable rate mortgages for property investors — the rate type decision is one of the most consequential you’ll make.
Sources: APRA | Reserve Bank of Australia | Australian Taxation Office