Even before you start searching for an investment property, one of the key steps and arguably the most important one is sorting out your budget and finances. Part of this is understanding your borrowing capacity, how much deposit you have and the ability to purchase and repay the loan.
In this particular case, we are focusing on the deposit which will help you acquire the property.
So how much deposit do you need?
It depends on the lender
Whilst most lenders would like to see a 20% deposit for an investment property, it is also possible to borrow with a 5% deposit or a low deposit loan.
When taking out a low deposit loan with most lenders you have to pay a lenders mortgage insurance (LMI) which is generally either a one-off premium or a fee added to your loan amount. This protects the lender in case you can’t meet your mortgage repayments or if you default on your loan. The Australian Tax Office allows you to claim a deduction for borrowing expenses associated with purchasing your property, and this includes LMI. This deduction is generally spread over five years or the term of the loan, whichever is less.
That is why it is very common for investors to save at least a 20% deposit before acquiring a property. But if this is not possible, there are other options!
When you have little or no cash for a deposit
If you don’t have sufficient savings in your bank account to put towards the deposit, here are some alternative ways to enable you to invest.
Your deposit can comprise of your savings as well as using equity from your existing home or a mixture of both.
A ‘line of credit loan’ allows you to borrow against the equity in your existing home and you only pay interest on the amount you’ve drawn.
If you don’t own a property, then an alternative method would be to secure a guarantor loan, which helps increase how much you can borrow.
Some financial institutions will offer guarantor loans in cases where a friend or a family member will guarantee a percentage of the mortgage on your behalf. They don't even need to guarantee the full loan, which is less risky for them.
There are other options too but best to consult a financial advisor to make an informed decision on what the right solution would be for your circumstance.
Have a cash buffer
When considering how much deposit you need, also keep in mind your ability to service the loan and have a cash buffer to be prepared for the unforeseen circumstances or expenses that might arise from holding the property.
Don’t over-leverage and use all your savings for the deposit and purchase costs, leave surplus funds to act as your personal and investment safeguards.
A cash buffer must be considered as part of your property investment strategy, so you can plan for the unexpected, invest safely and minimise risk.
Get qualified financial advice
Before making any important financial decisions we strongly advise you to consult a mortgage broker, financial advisor or accountant to choose the right loan for your circumstance and confirm your ability to purchase and hold an investment property.
If you don’t already have established relationships with these providers we have an A grade team of professionals that we would be very happy to put you in touch with. We align ourselves with only the best providers who have been tried and tested, to ensure your investment journey is memorable and hassle-free. You can email us at email@example.com to request these contacts.