The 28-year-old kept nine clean sheets in 19 appearances last season after taking over the No.1 jersey from Andrew Redmayne - who has since departed for Western Sydney Wanderers.
The former Brisbane Roar, Perth Glory and Melbourne Victory shot stopper said he was looking forward to helping City improve on last season's semi-final appearance.
"It's great to have signed on for another couple of seasons at the club," Velaphi said.
"It’s a great feeling to be back in pre-season with all the boys and we're working hard to build on what we were able to achieve last season.
"I'll be doing everything I can to get the best out of myself and help the team to be successful this season."
Melbourne City coach John van't Schip, who is yet to sign a replacement for Redmayne, was pleased to have secured Velaphi long term.
"Tando was a vital contributor for us last season and his record was a reflection of his hard work and positive attitude," Van’t Schip said.
"He is a quality player and a great character around the group and we are glad to have him with us heading into next season and beyond."
City has signed Ivan Franjic, Corey Gameiro and Steve Kuzmanovski recently with French winger Harry Novillo signing a permanent contract after impressing while on a short-term deal.
