A woman who stabbed her neighbour to death while she was walking her dogs in Sunbury, in Melbourne's outer north-west, has been found not guilty of murder due to mental impairment.

The Victorian Supreme Court found Eva Whitecross, 55, was suffering a delusional disorder when she stabbed Rachel Tyquin, 44, outside her home just before 6:00am on April 16, 2016.

The attack was the culmination of an 11-year fixation on Ms Tyquin, whom Whitecross deludedly believed had bugged her house, was conducting surveillance on her and had organised people to threaten her.

The court heard Whitecross stabbed the fitness instructor 19 times with a kitchen knife she had begun carrying for protection.

She then went home, had a shower, put her clothes in the washing machine and sent a text message to her husband which read: "you'd better come home right now."

After having a cup of coffee, she drove to the Sunbury police station and handed herself in.

The court heard Whitecross told police she did not get along with her neighbour and had become enraged when Ms Tyquin hit her in the face.

"I've been numb for a long time because I feel like I've been followed everywhere for a long time," she told detectives.

"I know there's been people in the house … I've been approached, intimidated, I don't know how many times … I became frustrated by her having me followed."

Before the murder, Whitecross had not had any contact with the mental health system.

The court heard she had sought help for anxiety from a naturopath in 2007 and was prescribed the herbal remedy St John's Wort.

Hostility sparked by parking dispute

The hostility between the pair began in 2005 when Ms Tyquin started running fitness classes from her home and participants would park in front of Whitecross's house.

At an earlier hearing, prosecutor Peter Rose told the court Tyquin had described seeing Whitecross "mowing the grass on the nature strip next to their cars in an attempt to spray stones and grass onto the cars".

"Mrs Whitecross approached the deceased asking her to tell her clients to stop parking in front of her house," he said.

"[Whitecross] describes the deceased as laughing at her before walking away.

"This response apparently upset and angered Mrs Whitecross, and from this time on she became more aggressive and abusive towards the deceased."

The court heard Whitecross began regularly yelling abuse at Ms Tyquin, who started fearing her neighbour.

The fitness instructor took out an intervention order against Whitecross for 12 months in 2012, the court was told.

Justice Jane Dixon told the court Whitecross "felt people were persecuting her on behalf of her neighbour".

She described Ms Tyquin as a "successful and well-regarded person" who could not have anticipated she would be attacked with a lethal weapon.

Whitecross will remain in custody until a hearing in October, when the court could make orders regarding further mental health treatment.