How much deposit is needed to buy an investment property?

Buying an investment property presents numerous hurdles but working out the required deposit is an important starting point.

Saving to buy a house savings concept with model house inside transparent piggy bank
A larger deposit can save hundreds of thousands of dollars over the length of a property loan. (Image source: Shutterstock.com)

It almost goes without saying that purchasing an investment property will involve a significant amount of money — including the amount required for the initial deposit.

Whether it is that first foray into the real estate market or expansion of an existing portfolio, getting a grasp on how much is needed to purchase an investment property will help in planning and budgeting accordingly.

There’s a lot of misinformation about how much is needed as a deposit, minimum deposit amounts, and how much can feasibly be used as a deposit for investment property purchases.

Here are the facts.

How much deposit do you need for an investment property?

Generally, a minimum of 20 per cent deposit (of the property’s value) is required for an investment property purchase. This 20 per cent will mean an 80 per cent loan-to-value ratio (LVR) on an investment property loan

So, for an investment property valued at $700,000, the expected deposit amount (20 per cent) is $140,000.

Can you purchase an investment property with less than 20 per cent deposit?

Saving for a house can be difficult – you may find that you don’t have enough funds from your savings or home equity to meet the minimum 20 per cent deposit amount.

Obviously, the 20 per cent can vary wildly depending on the value of the property, but this doesn’t necessarily mean that you can’t proceed with making your desired property purchase. 

Some lenders will allow you to borrow at an LVR of 90 per cent so you’ll only need to pay a 10 per cent deposit instead. Of course, this is not without a caveat — to borrow at this rate, you’ll need to pay lender’s mortgage insurance (LMI).

LMI is an additional fee that is usually added as a one-off premium to the loan amount.

Put simply, LMI is an insurance policy that provides protection for the lender in case the borrower can’t make the required repayments on the loan.

LMI is only applicable when the deposit amount is less than the typically 20 per cent, and is calculated as a percentage of the loan amount.

Can you buy an investment property with a 5 per cent deposit?

It is possible to buy an investment property with a 5 per cent deposit — some lenders may offer an LVR of 95 per cent.

Sounds too good to be true right?

Especially for those with minimal savings, and that’s because it usually is. Most property investors do not purchase an investment property with a 5 per cent deposit as there are several risks of doing so.

Low-deposit risks

Any deposit of less than 20 per cent of the price of the investment property is seen as a risk by lenders, as the borrowing amount will be significantly higher. 

  • With a larger loan amount, buyers face the cost of higher repayments, which places more pressure on their finances and recurring expenses. 
  • The cost of LMI isn’t an insignificant sum, and can often add up to tens of thousands of dollars. 
  • Borrowing a higher proportion of the purchase value makes buyers more vulnerable to future interest rate hikes, which add even more to the cost of the loan. 

For example: paying a 5 per cent deposit on a $500,000 home might cost $15,888 in LMI premiums upfront, and $398 more a month in repayments than on a loan. Compared a 20 per cent deposit, over the life of the loan the low-deposit home loan worked out to be $159,184 more expensive.

Factors that affect the deposit amount for an investment property

Loan-to-value ratio (LVR)

LVR refers to the share of the property’s value that the lender is willing to lend for the purchase. Most lenders are happy to offer an LVR of 80 per cent, resulting in a 20 per cent deposit requirement, while others may offer a 90 per cent LVR with the condition of LMI. 

Property type

The type of investment property can impose different conditions on the deposit and loan requirements, whether it’s an owner-occupier property or even an off-the-plan investment.

Financial circumstances

As a borrower, your individual financial circumstances and history will impact how much you can borrow, as well as how much perceived risk your loan request poses to lenders. Your credit score, repayment history, and income and employment will have an effect on how much deposit you will be required to pay — the more financially capable or stable you are, the higher your LVR will tend to be. 

Lenders preferences

Each lender has different approaches for their loan conditions and requirements, including deposit amounts. Get quotes from multiple lenders and compare them before deciding on the type of loan to take out.

Other ways you can meet a 20 per cent deposit

Use home equity

If you are a homeowner, you may be able to use the equity in your current home and put it towards the deposit on your new property, helping to cover a significant portion of the deposit amount. Tapping in your home equity may enable you to access up to 80 per cent of the home’s value, minus any outstanding repayment amount on your mortgage. Keep in mind that doing this may impact your repayment amounts on the existing mortgage. 

Can I use my super for a deposit?

Not many potential investors realise that they can draw funds from their superannuation account and use them towards the deposit for an investment property. This can only be done using a Self-Managed Super Fund (SMSF) which must be set up separately, unlike a regular super fund. 

Can parents be guarantors for investment property?

If you don’t have a property of your own to use as equity, your parents can offer a property of their own as additional security to cover the gap between your savings and the minimum deposit amount.

Investing in a property is a huge financial commitment, from the initial deposit amount to the final settlement costs.

An investment property, however, also holds the potential to build your wealth over time in ways that are difficult to achieve with regular income earnings. 

Article Q&A

How much deposit is needed for an investment property?

Generally, a minimum of 20 per cent deposit (of the property’s value) is required for an investment property purchase. This 20 per cent will mean an 80 per cent loan-to-value ratio (LVR) on an investment property loan. So, for an investment property valued at $700,000, the expected deposit amount (20 per cent) is $140,000.

Can an investment property be bought with less than 20 per cent deposit?

Some lenders will allow you to borrow at an LVR of 90 per cent so you’ll only need to pay a 10 per cent deposit instead. Of course, this is not without a caveat — to borrow at this rate, you’ll need to pay lender’s mortgage insurance (LMI).

Can you buy an investment property with a 5 per cent deposit?

It is possible to buy an investment property with a 5 per cent deposit — some lenders may offer an LVR of 95 per cent — but there are risks.

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