How Much Do I Need As A Deposit For An Investment Property?
Saving for a deposit for an investment property? When it comes to buying another house, understanding how much deposit for an investment property you will need is critical. This post will walk you through everything you need to know about having the right deposit for an investment property and how to make the most out of your financial situation.
Whether you’re a first-time investor or adding to your portfolio, knowing the standard deposit percentages, additional costs and factors that influence these amounts is essential.
Let’s head straight into the key points that you need to know.
Typical Deposit For An Investment Property
For an investment property, if you can aim to have your investment siting at an 80% LVR, this, or lower, would be ideal. That’s a 20% bank deposit + costs. We know this is not always possible and sometimes it’s better to buy with a low deposit and get in, rather than wait for the 20%. Do your own calculation on costs. Do your financial due diligence to assess the best way to add that next property in your portfolio. I’ll would advice to sit down a do a variety of different sets of numbers with different deposit amounts. Do a variation of costs associated with the deposit amount and see what your best option is.
Factors Influencing The Amount Of Deposit for An Investment Property
Some lenders offer exclusive deals for buyers with lower deposits, especially under 10%. These might be promotional offers or depend on factors like stable employment or high credit ratings. For instance, some lenders will offer a 95% Loan-to-Value Ratio (LVR) with slightly higher interest rates but waive LMI. Other factors will increase the amount of deposit you may have to pay – like location, credit history or loan type.
The deposit size is mostly determined by lender requirements rather than factors like property value or location directly. However, there are indirect impacts to consider as well.
Let’s look at the factors influencing a deposit for an investment property.
Factors Influencing The Amount Of Deposit for An Investment Property
1. Loan Type
Investment loans vs. owner-occupier loans might have different minimum deposit requirements (typically higher for investment loans).
Traditional “Low Doc Loans” aren’t as prevalent today, but there are still options available. In Australia, we have a “Guarantor Loan”. This type of loan allows a family member, usually a parent, to use the equity in their property as security for part of your loan. By acting as a guarantor, they help reduce the need for a large deposit, allowing the borrower to avoid Lenders Mortgage Insurance (LMI) and potentially borrow up to 100% of the property value.
Different lenders may use terms like “Family Guarantee” or “Family Security Guarantee,” but they all function in a comparable way by leveraging the guarantor’s equity to reduce the deposit requirements.
Factors Influencing The Amount Of Deposit for An Investment Property
2. Lender's Risk Assessment
Lenders assess risk based on factors such as property value, credit score, and location.
Higher-risk properties or locations might require a higher deposit to mitigate the risk for the lender.
Credit Scores of borrowers play a part in the amount of deposit the lenders will allow, the LMI and the interest rates charged for the loan. The less your “credit score”, the more payments showing up as missed in your report, the more credit cards you have – these would all contribute to a higher risk.
Factors Influencing The Amount Of Deposit for An Investment Property
3. Location, Location, Location
Some lenders may be stricter about properties in regional or over-developed areas due to higher risks (e.g., economic downturn or excess inventory), potentially requiring higher deposits or offering stricter terms. For instance:
- Mining towns in WA may require higher deposits due to the volatility of local economies.
- Over-supplied apartment markets in inner-city areas (like Melbourne/Sydney) might push lenders to demand higher deposits or impose stricter conditions.
- Regional Areas outside of larger cities may require the bank to want a bigger deposit – even up to 50% in some cases.
Factors Influencing The Amount Of Deposit for An Investment Property
4. Your Career
Some professions are considered lower risk by lenders, and as a result, lenders often allow a lower deposit (as little as 10%) and waive Lenders Mortgage Insurance (LMI) for them. The key reason is that these professionals tend to have stable, high-paying careers, making them less likely to default on loans.
Here are some professions that may qualify for LMI waivers:
Medical Professionals
- Doctors (General Practitioners, Specialists, Surgeons, etc.)
- Dentists
- Vets
- Pharmacists Medical professionals often qualify for LMI waivers because of their high earning potential and job stability. Some lenders allow them to borrow up to 90-95% Loan-to-Value Ratio (LVR) without paying LMI.
Legal Professionals
- Lawyers (Solicitors, Barristers, etc.)
- Judges Legal professionals also fall into the low-risk category, and many lenders offer similar LMI waivers for them, with borrowing limits up to 90%.
Accounting and Finance Professionals
- Accountants (Including Chartered Accountants and Certified Public Accountants)
- Actuaries
- Financial Planners Many lenders view accountants and finance professionals as lower risk, given their financial expertise, making them eligible for LMI waivers up to 90% LVR.
Engineers
- Civil, Mechanical, Electrical, and Software Engineers These professionals can often access LMI waivers due to their stable career paths and strong income potential.
Other Eligible Professions
- Mining and Resource Sector Professionals (e.g., geologists, surveyors)
- Pilots
- Teachers (in some cases, though this varies between lenders)
Each lender has its own criteria for eligibility, and it’s worth noting that not all lenders offer these benefits. For those who do, typically, you must meet specific criteria such as being a member of a relevant professional body, having stable employment, and a strong credit history.
Factors Influencing The Amount Of Deposit for An Investment Property
5. Lenders Mortgage Insurance (LMI)
LMI is as it sounds, a form of insurance. But it doesn’t protect the homeowner, instead we pay it to protect the bank. The lender (the bank or loan provider) makes the homeowner pay this insurance in case they (the homeowner) default on the loan.
LMI applies if the deposit for a home loan is less than 20%. So technically this decreases your deposit amount, but it increases the overall cost of the loan. The lender normally includes this into the cost of the loan, capitalizing the LMI amount.
Scenario:
- Property price: $500,000
- Loan-to-Value Ratio (LVR): 90% (meaning the borrower is providing a 10% deposit)
- Deposit: 10% of $500,000 = $50,000
- Loan amount before LMI: $500,000 – $50,000 = $450,000
- LMI premium: Let’s assume the LMI cost for a 90% LVR is $10,000 (this amount can vary based on the lender and insurer).
Incorporating LMI into the Loan:
Instead of paying the LMI upfront, lender allows the LMI premium to be added (capitalized) into the loan amount.
- New loan amount including LMI:
$450,000 (loan amount) + $10,000 (LMI) = $460,000
Final Equation:
- Original loan: $450,000
- Add LMI: + $10,000.
- Total loan amount: $460,000
Loan Structure:
Now, the borrower will repay $460,000 (which includes both the original loan and the LMI) over the term of the loan. This increases the total loan amount, which will affect the monthly repayments and the overall interest cost over the life of the loan.
The cost of LMI depends on the loan amount, the LVR (Loan to value ratio) and the lender.
LMI costs increase as the value of the house increases, and as the deposit decreases.
Example Of LMI costs
Here’s a basic idea of how it scales for a $1,000,000 property:
- 15% deposit (LVR 85%): $7,000 – $10,000
- 10% deposit (LVR 90%): $16,000 – $24,000
- 5% deposit (LVR 95%): $30,000 – $36,000
The exact amount depends on the lender and insurance provider, but these give an idea of the additional cost.
Factors Influencing The Amount Of Deposit for An Investment Property
6. Using Equity as a Deposit
Equity from an existing property can be used as a deposit instead of cash. When the loan-to-value ratio of the property allows, investors can use the available equity in their existing home as collateral. This can be done through home equity loans or refinancing existing properties.
Equity loan explained, Equity loan for investment property process, how do I access equity in my home, how does equity work when buying a second home. All these questions and more are answered and explained in the post links below. See if this strategy would suit your situation.
How To Use Equity In Your Home – 5 Smart Ways For Financial Growth
How Does Equity Work – 5 Expert Insider Tips You Need to Know
Factors Influencing The Amount Of Deposit for An Investment Property
7. Loan to Value Ratio (LVR)
There is a direct correlation between the Loan-to-Value Ratio (LVR) on a home loan and the perceived risk by the bank. This perceived risk significantly influences both the interest rate and any additional costs, such as Lenders Mortgage Insurance (LMI).
LVR is calculated as the loan amount divided by the property value. For instance, if you’re borrowing $400,000 for a $500,000 property, your LVR is 80% ($400,000 ÷ $500,000).
- Example:
If a property is valued at $600,000 and you borrow $480,000 (80% LVR), the deposit required is $120,000. Reducing the LVR to 70% would mean a $420,000 loan and a $180,000 deposit, which lowers the lender’s risk and could give you better terms (e.g., lower interest rate or waived LMI).
How LVR Influences Risk and Costs
Higher LVR = Higher Risk for Lenders
When the LVR is high (e.g., above 80%), it means the borrower has a smaller deposit and is borrowing a larger percentage of the property’s value. Lenders view this as riskier because:
- The borrower has less equity invested in the property.
- In the event of a default, the lender has less of a buffer if the property value declines.
- To mitigate this risk, lenders will often charge a higher interest rate for higher LVR loans.
Lower LVR = Lower Risk:
A lower LVR (below 80%) indicates that the borrower has put down a larger deposit and is borrowing a smaller percentage of the property’s value, which is considered lower risk. As a result, lenders are more likely to offer:
- Lower interest rates.
- Better loan terms, such as waived fees.
Impact of LVR on Interest Rates:
Lenders typically offer tiered interest rates based on LVR brackets.
For example:
LVR of 60% or lower: This is seen as low risk, and borrowers often get the lowest interest rates.
LVR between 60-80%: This is considered moderate risk, and interest rates might be slightly higher but still competitive.
LVR above 80%: This is considered high risk, and interest rates are generally higher due to the increased risk for the lender. Additionally, the borrower will likely be required to pay LMI if the LVR is above 80%.
Example of Interest Rate Correlation:
If a property is valued at $500,000:
With a 60% LVR (borrowing $300,000), the borrower may qualify for a lower interest rate (e.g., 3.0%).
With an 85% LVR (borrowing $425,000), the borrower might face a higher interest rate (e.g., 3.5%) and would be required to pay LMI.
Factors Influencing The Amount Of Deposit for An Investment Property
8. Property Type
When purchasing off-the-plan or pre-construction properties, the deposit requirements can work a little differently compared to buying an established property.
For off-the-plan or pre-construction purchases, the required deposit is typically similar to other property purchases—around 10-20% of the purchase price. However, the way you pay the deposit and the timing, can vary.
In these types of purchases, you usually don’t pay the entire deposit upfront. Instead, it is split into two stages:
- Initial Deposit on Signing the Contract: When you sign the contract for an off-the-plan property, you’ll generally pay an initial deposit, which is often around 5-10% of the purchase price. This is like securing your place in the development.
- Balance Paid on Settlement: The rest of the deposit or the remaining amount of the loan (if any) is paid on settlement, which occurs when the construction is complete, and the title of the property is transferred to you. At this stage, you may pay the remaining 90-95% of the loan, minus any other contributions like equity or grants.
Time Lag Between Deposit and Settlement
Because there’s usually an extended period (sometimes 1-2 years) between paying the initial deposit and settlement, investors may have more time to save up additional funds or equity for the final payment. This can influence how much money you need upfront compared to buying an established property, where the full deposit and balance are typically required at the same time.
Potential for Deposit Bonds or Bank Guarantees
In some cases, developers may accept deposit bonds or bank guarantees instead of cash deposits. These products allow you to secure the property without needing to hand over a large cash deposit upfront, effectively deferring the need for cash until settlement.
Lender Requirements
Lenders generally treat off-the-plan purchases the same as other property purchases in terms of loan-to-value ratio (LVR). If your deposit is below 20%, you may still need to pay Lenders Mortgage Insurance (LMI) or find ways to meet lender requirements through a guarantor or equity from another property
Factors Influencing The Amount Of Deposit for An Investment Property
9. Additional Expenses
It’s not only the initial banking deposit for the loan amount that will need to be factored in. When reviewing the amount for a deposit for an investment property, you will need to cover additional expenses associated with the purchase of property.
Here are some key expenses that should be included in the deposit for an investment property amount:
Stamp Duty
Stamp duty is a state-based government tax in Australia. It is a tax that property buyers must pay when purchasing real estate. The amount of stamp duty is usually calculated based on the property’s value or purchase price.
Each state and territory in Australia have its own rules and thresholds for how stamp duty is applied, which means the cost can differ significantly depending on where the property is located. For example, some states offer concessions for first-home buyers, off-the-plan purchases, or vacant land. This is one of the biggest costs apart from the deposit itself so it’s crucial for investors to factor this in.
Legal and Conveyancing Fees
A solicitor and/or conveyancer are an integral part of your Property Investment Team. They are there to manage the legal aspects of the purchase. This can include title searches, contract reviews, and of course, settlement.
These costs depend on the complexity of the transaction and the professional you hire. On average you’re looking at $1,500 – $3,000. This covers title searches, preparing the contract of sale, and managing the settlement process. Anything else involved in the settlement process will probably attract further fees.
Building and Pest Inspections
Property investors should have a thorough inspection done to check for any structural or pest issues. These inspections come with a cost but are crucial for risk management. The cost of a comprehensive inspection will depend on property size and location. $400 – $800 is an average price for both building and pest inspections. Investors should budget for this even if it’s not a mandatory step.
Loan Application or Mortgage Fees
Some lenders charge upfront fees for loan processing, document preparation, and other administrative tasks. These costs can vary, so it’s important to ask the lender about them in advance. These fees can be from $500 – $800. Some lenders waive these fees as part of their marketing efforts, but it’s common for them to apply.
Property Valuation Fees
Lenders typically require a property valuation to assess the value of the investment. Sometimes the lender covers this, but in some cases, the buyer will have to pay the fee.
Many lenders require an independent valuation before they approve the loan. These fees typically range of $400 – $800. Some banks will absorb this cost, but it’s often passed on to the buyer.
Buyer Agent Fee's (if applicable)
If you use a buyer’s agent to help with the purchase, there will be a fee for their services, usually calculated as a percentage of the property price or a flat fee. Their fee will generally be 1.5% – 2.5% of the property price, or $5,000 – $15,000 as a flat fee. This can be higher for high-demand areas or difficult-to-find properties.
Home and Land Insurance
Many lenders require proof of home insurance at the time of settlement, especially for investment properties. Ensuring you have this organized ahead of time will avoid delays.
Costs varies so much from insurer to insurer, but is based on the property’s size, location, and construction type.
Miscellaneous Administrative Costs
This could include fees for registering the mortgage, title transfer costs, or any additional minor charges like extra search fees, which arise during the settlement process. $300 – $500 would normally cover these. These are relatively minor, but it’s worth budgeting for them in advance.
Repairs or Renovations
These are not a cost for everyone, but for investors buying older properties, initial repairs or minor renovations might be necessary to make the property rentable. These should be factored into the overall deposit budget.
A Common Formula To Calculate The Total Deposit Needed For An Investment Property
When you’re initially looking to purchase, this formula will give you an estimate of the total upfront funds you’ll need as a deposit for an investment property.
Total Upfront Costs =
(Property Price × Deposit Percentage) + (Property Price × Additional Costs Percentage)
Breakdown:
- Deposit: Typically, 10-20% of the property price (depending on LVR and loan terms).
- Additional Costs: Typically, 5-7% of the property price for things like:
Example:
For a $500,000 property with a 10% deposit and 5% additional costs:
- Deposit:
$500,000 × 0.10 = $50,000 - Additional Costs (e.g., stamp duty, legal fees):
$500,000 × 0.05 = $25,000 - Total Upfront Costs:
$50,000 (deposit) + $25,000 (additional costs) = $75,000
So, in this case, the buyer would need $75,000 upfront (deposit + additional costs).
It is always best to confirm any costs before you sign any contract for purchase or any loan from the bank.
Understanding how much deposit you need for an investment property is essential for making informed decisions. In this blog, we’ve explored the typical deposit for an investment property and the nine factors influencing deposit amounts. We discussed additional costs you need to factor in, such as stamp duty and legal fees. You’ve also learnt about the role of LMI, how Loan-to-Value Ratio impacts your deposit, and the potential for using equity as a deposit.
Knowing the amount of deposit for an investment property you will require will now assist you with setting savings goals. By planning carefully and considering all these elements, you can set yourself up for success in the property investment market.
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This blog contains my opinions and doesn’t reflect the opinions of any organizations I might suggest or be affiliated with. Any information provided on my blogs is accurate and true to the best of my knowledge, but there may be omissions, errors or mistakes. The information presented in this blog is for informational purposes only and shouldn’t be seen as any kind of advice, such as legal, tax, financial, emotional or other types of advice. I don’t know you, and I don’t know your own personal or business circumstances, so please don’t rely on any information in this blog and take it as personal or professional advice for you specifically. Always seek advice from your own professionals.
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