Avoid These 5 Mistakes When Buying Rental Property

Thinking You Need 20% Deposit Before You Act

You do not need a 20 per cent deposit to purchase a rental property. Lenders accept deposits as low as 10 per cent on investment purchases, though you will pay Lenders Mortgage Insurance on the premium above 80 per cent LVR. In our experience working with Central West investors, the larger upfront cost is often not the deposit itself but the cumulative settlement figure that includes stamp duty, legal fees, LMI and a cash buffer for early vacancy or repairs.

Consider a buyer who owns their home in South Dubbo with $120,000 in accessible equity and wants to purchase a two-bedroom unit in Narromine as a rental. With 90 per cent LVR, the buyer can borrow against both the existing property equity and the investment property itself, funding the deposit and most costs without liquidating other investments. The LMI premium in that scenario sits around $8,000 to $10,000 and can be capitalised into the loan amount, leaving the buyer to cover stamp duty, legals and a holding reserve from savings or further equity release. Structuring the loan this way keeps the buyer's cash position intact while the property starts generating rental income within weeks of settlement.

Choosing Interest Only Because Everyone Else Does

Interest-only repayments reduce your monthly outgoing and can improve cash flow in the early years, but they do not reduce your loan balance. The appeal is that every dollar of interest paid is typically deductible against your rental income and other assessable income, while principal repayments are not. However, from 1 July 2027, net rental losses on residential investment properties acquired after 7:30pm AEST on 12 May 2026 can only be offset against other residential rental income or carried forward, not against salary or wages. That change reduces the immediate tax benefit of maximising deductions through interest-only structures for properties purchased after that date.

For properties purchased before 12 May 2026 or eligible new builds, interest-only loans still deliver the full deduction against other income. For properties caught by the new quarantine rule, principal and interest repayments start to look more attractive because you are building equity without relying on a tax offset you can no longer access in full. The decision turns on purchase date, your marginal tax rate, and whether the property will be cash-flow positive or negative in the first few years. We regularly see investors in Dubbo and the Central West who assume interest-only is always the right answer and then find themselves with a loan balance that has not moved after five years and a tax position that has shifted under them.

Skipping the Vacancy and Maintenance Buffer in Your Serviceability

Lenders assess your capacity to service an investment loan at an interest rate at least 3 percentage points above the product rate and apply a haircut to your expected rental income, typically between 20 and 30 per cent depending on the lender. That haircut accounts for vacancy, repairs and management costs. The borrower's mistake is not in the lender's calculation but in their own. Many investors budget for a rental yield based on 52 weeks of occupancy and zero unplanned repairs, then face a three-week gap between tenants or a $2,500 hot water replacement in the first six months.

Dubbo's rental vacancy rate has been low in recent years, but rural and regional markets can shift quickly when mining activity slows or local employers restructure. A property that sits vacant for four weeks costs you a month of rental income plus ongoing loan repayments, insurance, rates and utilities. If your personal cash flow is already tight and you have not held back a buffer, that gap gets funded on a credit card or offset drawdown, and the investment starts to feel like a liability rather than an asset. Build a separate reserve equal to at least two months of loan repayments and holding costs before you settle, and do not touch it unless the property genuinely needs it.

Locking in a Fixed Rate Without Understanding Break Costs

A fixed rate gives you repayment certainty, but if you need to sell, refinance or pay down the loan during the fixed period, you may face break costs calculated on the difference between your fixed rate and the lender's cost of funds at the time of break. Those costs can run into thousands of dollars if market rates have fallen since you fixed. For an investment property, the risk is higher because investors are more likely to sell or restructure within a few years than owner-occupiers, particularly if the property is part of a broader portfolio or the investor's circumstances change.

Variable rates give you full flexibility to make extra repayments, switch lenders, or sell without penalty. Depending on your deposit size and lender, you may also access a better discount on a variable product than a fixed one, particularly if you are borrowing above 80 per cent LVR. If you do fix, consider a split structure where part of the loan is fixed and part remains variable, so you retain some flexibility without giving up rate protection entirely. You can learn more about how fixed rate products work and what happens at expiry on our fixed rate expiry page.

Treating Your Investment Loan Like Your Home Loan

Investment loans and owner-occupied loans are assessed differently, priced differently, and structured differently. Investor loans generally attract higher risk weights under APRA's capital standards and may carry a rate premium of 20 to 60 basis points compared to an owner-occupied loan at the same LVR. Lenders also apply stricter serviceability tests because rental income is not guaranteed and investors are statistically more likely to default in a downturn than owner-occupiers.

That difference flows through to product features. Offset accounts on investment loans often come with a higher rate loading than on owner-occupied loans, and some lenders do not offer offset at all on interest-only investment products. Redraw facilities are common, but withdrawals can create tax complications if you are using the loan for both investment and private purposes. The cleanest structure is a standalone loan for the investment property with no cross-purpose use, so every dollar of interest is deductible and your records stay simple. If you are using equity from your home to fund the deposit, that drawdown should sit in a separate split or loan account, not mixed with your owner-occupied borrowing. We cover the distinction in more detail on our investment loans page.

You do not need to navigate this alone. If you are weighing up your first investment purchase or adding to an existing portfolio in Dubbo, Narromine, Wellington or anywhere across the Central West, call one of our team or book an appointment at a time that works for you. We are locally owned, we do not charge fees to our clients, and we have access to investment loan products from lenders right across Australia. You can reach us on (02) 6882 1766 or book online seven days a week.

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