I have not used VFD's for a long time, usually use servos for spindles now. However on my first retrofit (Bridgeport) I used a VFD and didnt have an issue when it was in the same cabinet, all wires however were shielded and also the VFD was a reasonable quality one, I have heard some of the cheaper Chinese ones can produce quite a lot of noise.
Regarding my Drives, they are Telemechanique Lexiums for the axes and an Allen Bradley DSD for the spindle. They can accept Step and Direction but I have chosen to use them in Velocity mode with +/- 10v analogue control signal, the controller is a CSMIO/IP-A and it is, to put simply, the best controller I have used with Mach. I also have the Step/Dir version (CSMIO/IP-S) on a small lathe and it too is a quality controller but the IP-A has some advantages, even over it.
Personally that is the route I would take with your machine, assuming the original drives are still ok. You would have to replace the encoders as the IP-A needs ttl encoders. I see CS Lab now sell encoders as well.
Regarding tight cabinets and noise, here is a pic of the Bridgeport cabinet when I converted it over to servos, everything is in that cabinet including the computer and controller.
Hood