Before starting or growing your portfolio, one of the most critical aspects you need to consider is how much deposit you need for an investment property.
Being a property investor is a long-term and expensive commitment that involves purchasing real estate to generate income through rent or capital appreciation. Having a solid understanding of the deposit requirements can guide you through your loan terms, interest rates, property selection and investment strategies.
To get a head start, this guide will take you through the deposit requirements to buy an investment property, low-deposit investment loans and the benefits and risks of investing in a property in Australia.
The deposit requirements for investment loans in Australia vary based on several factors, including your financial situation, lender and borrowing power. Like home loans, you need to save at least 20% of the property’s purchase price.
To give you an idea of how much deposit you need for an investment home, here are some examples:
|Property value||Deposit (20%)|
If you don’t have a 20% deposit yet, some lenders may allow you to borrow more than 80% of the property value if you meet strict criteria, such as clean credit history, strong income and stable employment.
However, note that you may need to pay Lender’s Mortgage Insurance (LMI) if your loan-to-value ratio (LVR) is higher than 80%. LVR refers to the ratio of your loan to the property’s value. For example, if the property is worth $600,000 and you borrow $480,000, your LVR is 80%.
Aside from your deposit, you should also factor in other fees associated with your investment property loan. These may include:
- Stamp duty: Stamp duty or transfer duty varies per state and territory, so it’s best to check with your State Revenue Office. To make it easier, you can use our stamp duty calculator to check how much it will cost you.
- Lender’s Mortgage Insurance: As mentioned, LMI is payable when you borrow more than 80% of the property’s purchase price.
- Conveyancing and legal fees: When you purchase or sell an investment property, you also need to cover the associated legal costs, including the exchange of contracts.
- Valuation fees: You need to get a valuation to ensure you’re not overpaying. Lenders may assign a professional for the property valuation or let you use a third party.
- Loan application fees: Depending on your lender, you may or may not need to pay for your application.
- Building and pest inspections: These fees cover the property’s assessment, including its quality, major and minor structural issues, safety hazards and insect infestations.
- Ongoing costs: Apart from the upfront costs involved in investment properties, you also need to pay ongoing fees, such as loan repayments, council rates, maintenance and repair costs, water bills, insurance and more.
First Home Owner’s Grant
If you qualify and buy a property to live in, you can claim one-time financial assistance through the First Home Owner’s Grant (FHOG). The FHOG can range from $7,000 to $30,000 based on the state or territory, and you can add this amount to your deposit.
In general, you need to live on the property for at least 6 to 12 months (depending on the location). Then, you can move out and convert the property into an investment property.
Since the FHOG varies per location, check with your state’s requirements before considering this investment strategy.
Self-Managed Super Fund
If you have reasonable savings in your super, another way to help you purchase an investment property is through a Self-Managed Super Fund (SMSF). While SMSF can aid in buying a property, you need to comply with the rules set by the Australian Taxation Office (ATO):
- Meet the “sole purpose test” of providing retirement benefits to fund members.
- You can’t obtain the property from a related party of a member.
- A fund member or any fund members’ related parties cannot rent or live in it.
You need to take limited recourse borrowing arrangements (LRBA) to secure a loan using your SMSF. LRBA involves holding the investment property in a separate trust. In case the loan defaults, the lender can only access the property held in the separate trust to protect the remaining assets in the SMSF.
Low-deposit investment loans
Using your equity
If you own a property, you can tap into your home equity and use it as your deposit for an investment property. Equity is the difference between your property’s value and your outstanding home loan amount.
You can calculate your equity by taking the difference between the price of the property and what you currently owe to the bank. However, most banks won’t let you access 100% of your equity. Based on your case and lender, you may unlock up to 80% of your property’s value.
To find out your usable equity, subtract your loan balance from 80% of the price of the property. Consider this example:
Once you know how much equity you own, you can use the equity in different ways. Speak with one of our lending specialists to assess which option best suits you.
Having a guarantor
If you don’t have a full deposit yet or available equity, you can consider using a guarantor. A guarantor is usually a direct or immediate family (parents) who can help you with your loan by agreeing to put up a part of their home as additional security for your loan.
With this option, you can borrow more than 80% of the purchase price without paying LMI. Since a guarantor loan is risky, some lenders only accept limited guarantees.
Paying Lender’s Mortgage Insurance
Another option to afford an investment property deposit is to pay LMI. If you don’t have a 20% deposit, a guarantor or equity, you may take out a low-deposit investment loan if you qualify. Depending on your situation and lender, you may deposit as low as 5% and borrow up to 95%.
However, the catch is you need to pay LMI if you borrow more than 80% of the property’s value. Don’t worry, your It’s Simple broker can break down your LMI premium and other options that can help you save more.
Alternative ways to finance your investment property
Using a gifted deposit
It’s possible to fund a property investment through an inheritance or cash gift deposit. If you have a large lump sum, it can help with your deposit amount.
Banks and lenders still want to make sure you can meet your repayments, so they may require proof of genuine savings.
Applying for a personal loan
Personal loans do not require collateral, so they tend to have higher interest rates. While this can help you with your deposit, remember that you also need to pay your investment loan. You need to meet stricter lending criteria and show that you can service both loans.
Borrowing from a family member
Instead of applying for a loan from a bank, you may consider borrowing your deposit from your family. This way, you can easily negotiate your terms and repayments.
Benefits and risks of investing in property
One of the biggest advantages of owning an investment property is the tax deductions. In Australia, property investors can enjoy tax perks through negative gearing and property depreciation.
Negative gearing is when your investment expenses (i.e. interest repayments, maintenance costs, etc.) outweigh your rental income. While you incur a loss, you can offset the loss against your taxable income.
For example, let’s say that your taxable income is $130,000. You have a rental property that costs you $35,000 a year, and you collect $25,000 in rent.
Since your property is negatively geared, you can deduct the $10,000 annual loss from your taxable income. In turn, your taxable income would only be $120,000.
Meanwhile, property depreciation allows you to claim tax deductions on the decline in the value of your investment property (building structure, removable equipment, etc.). Since this lessens the tax payable, some seasoned property investors take property depreciation into account before purchasing an investment property.
Another reason why real estate is an attractive investment is the passive income you can generate. If your rental income is higher than your investment expenses, your property is positively geared. As you rent out your property, you can generate positive cash flow that will help you pay for mortgage repayments, maintenance and more.
Another potential benefit of property investment is capital gain, which refers to an asset’s value increase. If you bought a property located in an area with strong demand and development, its value can increase over time. Then, you can profit from it by selling it.
While the market may fluctuate, properties are less volatile compared to other forms of investment, such as shares and bonds. This makes property investment an attractive choice to many investors.
Even if the property market is less volatile, property prices can increase and decrease depending on the RBA’s cash rate and the economy. This may lead to negative equity, which refers to when you owe more than the property is worth.
Property investment is more expensive compared to other investments, so you need a huge amount of capital for it. You should also factor in ongoing costs, such as maintenance and repairs (i.e. paint, roofing, etc.).
Moreover, you need to be prepared for the possibility of not having tenants sometimes. There may be times when your property is vacant, so it can be challenging if you rely on the rental income and need to cover all the costs related to managing your property.
If you need emergency cash or your circumstances changed, you can’t easily pull out money from your investment property any time you want. This risk can force you to sell your property at a lower price.
Ready to take control of your loan?
Buying an investment property comes with numerous benefits, such as rental income and capital gain, but it also comes with risks. Becoming an investor requires time, effort and financial commitment, so take a careful approach and consider your objectives and alternatives.
Understanding the deposit requirements is a crucial step in property investment because it affects your investment strategy, the costs and the financial resources you can consider to invest smarter.
To prepare and control your investment loan, get in touch with our mortgage brokers to get expert help from the start and beyond. It’s Simple will help you break down your options, enjoy tailored choices from the top 40+ banks and lenders in Australia and help you choose and apply for the right loan solutions that will help you build and grow your investment portfolio.
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