The Easiest Way to Finance a Prahran Investment Unit

Understanding Investment Loans for Prahran Units

An investment loan is structured differently from an owner-occupied home loan, with lenders assessing rental income alongside your borrowing capacity and applying a different serviceability approach. When you're buying a unit in Prahran, the lender will assess the projected rental income at 80 per cent of market rent to account for vacancy periods and maintenance costs, then add that to your other income when calculating how much you can borrow.

Consider a scenario where a couple earning $180,000 combined looks to purchase a two-bedroom unit near Chapel Street. The unit has an expected rental return of $650 per week. The lender includes $26,000 annually (80 per cent of $32,500) when assessing serviceability, but the full purchase price and existing debts are factored into the debt-to-income calculation introduced in February. The DTI cap means lenders can only allocate 20 per cent of new investor lending to borrowers with a debt-to-income ratio of six times or more, which has tightened access for buyers with substantial existing mortgages or lower incomes.

Prahran attracts a mix of long-term renters and professionals working in the CBD or Southbank, which supports consistent demand. The suburb's proximity to tram routes along High Street and Commercial Road, along with cafes and retail along Chapel Street, reinforces its appeal to tenants. Units closer to public transport or within walking distance of Prahran Market tend to attract lower vacancy rates, which lenders view positively when assessing rental income projections.

Deposit and Lenders Mortgage Insurance for Prahran Units

Most lenders require a minimum 10 per cent deposit for an investment property, though a 20 per cent deposit allows you to avoid Lenders Mortgage Insurance. LMI is a one-off premium that protects the lender if you default, and it can add several thousand dollars to your upfront costs when borrowing above 80 per cent of the property's value.

If you're purchasing a unit at the median price point for Prahran and borrowing at 90 per cent loan-to-value ratio, LMI may cost between $8,000 and $15,000 depending on the lender and your borrowing amount. Some lenders allow you to capitalise LMI into the loan, but this increases your ongoing repayments and reduces the equity available for future purchases. A 20 per cent deposit eliminates LMI entirely and positions you more favourably for rate discounts.

Investors who already own property may use equity release to fund the deposit without needing to save additional cash. If you have sufficient equity in your home or another investment, the lender can take a second mortgage over that property to fund the deposit and costs for the Prahran unit. Equity lending allows you to enter the market sooner, but it increases your overall debt and requires careful serviceability planning, particularly under the new DTI caps.

Interest Only Versus Principal and Interest Repayments

Investment loans can be structured as either interest-only or principal and interest, and the choice affects both cash flow and your ability to claim tax deductions. Interest-only repayments are lower each month because you're not repaying the principal, which improves cash flow and allows you to maximise the interest deduction against rental income.

Most lenders offer interest-only periods of up to five years on investment property loans, after which the loan reverts to principal and interest unless you apply for an extension. If you're planning to hold the property for capital growth rather than paying down debt, interest-only repayments free up capital for other investments or to offset against other loans. If your strategy involves building equity through repayments, principal and interest may be more appropriate, though it reduces your annual tax deduction since only the interest component is claimable.

The interest you pay on borrowings used to acquire or hold the investment property is fully deductible against rental income, provided the property is rented or genuinely available for rent. If the property is used privately at any time, the deduction must be apportioned. Loan establishment fees, ongoing account fees, and other borrowing expenses are also claimable, either in full in the year incurred or spread over five years depending on the amount.

How the Negative Gearing Changes Affect Prahran Unit Buyers

From 1 July 2027, investors who purchase established residential property on or after 7:30pm AEST on 12 May 2026 will no longer be able to offset net rental losses against salary or other non-residential income. Losses can only be offset against other residential rental income, carried forward to offset future residential rental income, or applied against capital gains when the property is eventually sold.

This change does not affect units purchased before that date and time, including properties under contract before 12 May 2026 even if they settle afterwards. It also does not apply to eligible new residential dwellings, defined as properties constructed on previously vacant land or developments that increase the total number of dwellings on a site. A knock-down rebuild that does not increase dwelling numbers is not eligible, and a newly built unit that has been occupied for more than 12 months before being sold loses eligibility for subsequent purchasers.

For a Prahran investor buying an established two-bedroom unit in a period building or an older low-rise development, rental income may not cover all holding costs in the early years. If your salary is $120,000 and your rental loss is $8,000 annually, under the previous rules you could offset that loss against your salary and reduce your taxable income to $112,000. Under the new rules applying from 1 July 2027, the $8,000 loss is quarantined and can only offset future rental profits or capital gains on that property or other residential rental properties you own. This affects cash flow during the holding period and makes careful budgeting more important.

Choosing Between Variable and Fixed Investment Loan Rates

Variable rates on investment loans are typically higher than owner-occupied rates, with lenders pricing in the additional risk and regulatory capital requirements for investor lending. Fixed rates lock in your repayments for a set period, usually between one and five years, which provides certainty but removes flexibility if you want to make extra repayments or access redraw facilities.

If you fix the entire loan amount and rates fall, you'll continue paying the higher fixed rate until the term expires. If you need to break the fixed term early due to a sale or refinance, break costs can be substantial depending on how far rates have moved since you fixed. Many investors use a split strategy, fixing part of the loan for rate certainty and leaving part variable to retain flexibility and benefit from any rate reductions.

When selecting a loan product, pay attention to features beyond the headline rate. Offset accounts are less common on investment loans and often come with higher rates when available, but they allow you to park surplus cash and reduce the interest charged without affecting your tax-deductible interest. Redraw facilities allow you to access extra repayments you've made, but if you're on interest-only, there are no extra repayments to redraw unless you've made voluntary principal payments.

Body Corporate Fees and How Lenders Assess Them

Units in Prahran, particularly in older Art Deco buildings or newer apartment complexes, come with body corporate fees that can range from $1,500 to over $5,000 annually depending on the age of the building, shared facilities, and the sinking fund balance. Lenders include body corporate fees as an ongoing expense when assessing serviceability, which reduces the amount you can borrow.

A unit with quarterly body corporate fees of $1,200 costs $4,800 per year, which the lender treats as a fixed outgoing alongside your loan repayments, council rates, insurance, and estimated maintenance. If the body corporate has a low sinking fund balance or upcoming special levies flagged in the owners' corporation records, some lenders may reduce the valuation or decline the application altogether. Buildings with unresolved cladding issues, major structural defects, or compliance disputes are difficult to finance and may not be acceptable security even if the purchase price is below market.

When assessing a Prahran unit, ask your conveyancer to review the owners' corporation records carefully and flag any concerns before you commit. Buildings with strong sinking funds, proactive committee management, and no outstanding tribunal disputes are viewed more favourably by lenders and tend to hold value more reliably over time.

Maximising Tax Deductions Beyond Interest

In addition to loan interest, investors can claim a range of expenses associated with owning and maintaining the property. Council rates, water charges, building insurance, landlord insurance, body corporate fees, property management fees, and repairs are all fully deductible in the year incurred, provided the property is rented or available for rent.

Depreciation on the building structure and fixtures can also be claimed, though changes introduced several years ago mean plant and equipment depreciation is only available on new properties or items you've purchased and installed yourself. A quantity surveyor can prepare a depreciation schedule that identifies claimable amounts over the life of the building and fixed assets, which may add several thousand dollars in deductions annually depending on the age and construction of the unit.

Advertising costs to find tenants, lease preparation fees, and property management software subscriptions are also claimable. If you travel to inspect the property or meet with agents, travel costs may be deductible depending on the purpose and frequency. Keep detailed records of all expenses and consult a tax adviser to confirm what applies to your circumstances, particularly given the changes to negative gearing and capital gains treatment introduced under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

Refinancing to Support Portfolio Growth

Once you've held the Prahran unit for a period and it has increased in value, you may be able to refinance to access equity for your next purchase. Equity is the difference between the property's current value and the outstanding loan balance, and lenders will typically allow you to borrow up to 80 per cent of the property's value without incurring LMI.

If the unit was purchased for $600,000 with a 20 per cent deposit and has since increased in value to $680,000, and you've paid down $30,000 of principal, your equity position is approximately $190,000. You could refinance up to 80 per cent of $680,000, which is $544,000, and use the difference between that and your current loan balance to fund the deposit on a second property. This approach allows you to expand your property portfolio without needing to save another deposit from after-tax income, though it increases your overall debt and requires strong serviceability.

Refinancing also allows you to secure a lower rate if your current loan is no longer competitive, or to switch from principal and interest back to interest-only if your lender has reduced your interest-only term. When refinancing an investment loan, confirm that any break costs on fixed terms, discharge fees, and new application fees are outweighed by the ongoing savings or strategic benefit.

Investing in a Prahran unit offers access to a tightly held inner-city market with consistent rental demand, but the financing and taxation framework has shifted significantly. Call one of our team or book an appointment at a time that works for you to discuss your borrowing capacity, loan structure, and how the negative gearing and capital gains changes apply to your situation.

Frequently Asked Questions