How much deposit do you need to buy an investment property?
For success in the investment property market, one must have a solid understanding of key financial components, particularly the deposit required to reserve an investment property. This deposit plays an important role in the buying process, impacting loan alternatives, interest rates, and the requirement for Lenders Mortgage Insurance (LMI).
LMI is insurance that borrowers purchase to shield the lender in the event that they miss payments on their loans. For loans requiring less than a 20% down payment, this is usually necessary.
To avoid paying LMI, the normal deposit required in Australia is 20% of the property’s worth, though possibilities might vary according to the lender, the investor’s financial situation, and the type of property. Leveraging equity from current assets and the deposit’s impact on lending terms are two significant concerns.
The purpose of this discussion is to give investors the information they need to make wise choices by matching deposit considerations to their investment objectives and financial capacity.
The fundamentals of deposit calculation
When purchasing an investment property, the buyer’s initial payment to secure the property is referred to as a deposit.
It’s basically the portion of the entire purchase price that you pay up front; a mortgage usually covers the remaining amount. Lenders require deposits as a safeguard against default and as an indication of good faith. It shows the buyer’s commitment and sound financial standing.
Standard deposit rate - the 20% benchmark
In Australia, a 20% down payment on the purchase price of an investment property is the standard protocol. By using this benchmark, the lender can avoid LMI, an insurance policy that guards the lender in the event that the borrower defaults on the loan.
For instance, if the investment property is valued at $500,000, a 20% deposit would amount to $100,000. The formula to calculate the deposit is straightforward:
$500,000 (property value) x 20% (deposit percentage) = $100,000 (deposit amount).
Alternatives for those unable to meet the 20% threshold:
Low-deposit options
Low-deposit loans are an alternative for investors who are unable to offer the required 20% down payment. These loans may only need 10% of the property’s worth as an upfront payment. Although this can make it simpler to enter the real estate market, it frequently requires the purchase of LMI, which raises the loan’s total cost.
For instance, a $500,000 property with a 10% deposit would mean a $50,000 initial payment but incurs additional LMI fees.
Utilizing equity from existing properties
Equity, which is your property’s value less the amount owed on your mortgage, can be a useful instrument for funding additional investments.
The equity in an investor’s $600,000 property is $300,000 if they owe $300,000 on their mortgage. That comes to $480,000 ($600,000 * 80%) if the lender allows borrowing against 80% of the property’s worth.
This amount is reduced by the remaining mortgage ($300,000), leaving $180,000. This is the investor’s usable equity that they may use for additional investments or other uses.
By using this equity as a deposit for the purchase of a different property, one investment can be leveraged to fund another.
Strategic planning in property investment
Selecting the ideal investment property involves more than simply leveraging equity or locating low-deposit options. It involves a thorough approach that considers the investor’s long-term objectives, current market conditions, and the growth and rental return potential of the property.
This planned strategy should take into account the implications of various financing alternatives, such as how employing equity can effect your financial situation and how Loan-to-Value (LVR) can affect your investment.
Every choice you make, whether it’s to use low-deposit choices, leverage equity, or comprehend LVR, is important for developing a profitable investing strategy.
Beyond the deposit: other financial considerations
Significance of upfront costs
Investors need to budget for substantial upfront expenses, which can add thousands to the original investment, such as stamp duty, legal fees, and inspection costs, in addition to the deposit. For instance, depending on the city, stamp duty might vary from 1.5% to over 6% of the acquisition price of the property, which has a big impact on the total cost of the investment.
Understanding borrowing power
The amount that can be borrowed and, thus, the size of the deposit are directly influenced by one’s borrowing capacity, which is determined by lenders using information about income, debts, expenses, and credit history.
Strong financial standing and a high salary, for example, can boost borrowing power and enable a larger loan, but they may also require a greater deposit to maintain an ideal LVR and prevent LMI.
Impact of cash flow and ongoing property expenses
The cash flow of the investment is impacted by ongoing costs including property insurance, maintenance, council rates, and property management fees.
For the investment to remain sustainable and to have a positive cash flow, these costs must be managed effectively.
For example, a property with a high rental yield but high recurring costs might not be as profitable as first thought.
Start your investment journey with us
With $85,000 in savings or equity, you can begin or grow your investment portfolio with high-growth
properties in Australia's strongest property markets.
With $85,000 in savings or equity, you can begin or grow your investment portfolio with high-growth properties in Australia's strongest property markets.
Leveraging professional advice in your investment journey
The value of expert consultations
Engaging with financial planners, mortgage brokers, and real estate experts provides invaluable insights that can significantly impact the success of your investment. We at The Investor’s Agency can help you secure a loan with terms that match your financial capabilities and investment objectives, potentially saving thousands in interest over the loan’s life.
Tailoring advice to your needs
Since every investor’s circumstances are different, they should all receive customised advice that takes into account their investment objectives, risk tolerance, and financial condition. Financial planners can design customised plans that support your long-term goals, whether they involve earning rental income or increasing capital through appreciation. This customised method guarantees the sustainability and strategicity of your investment choices.
Refining your investment plan
Closing Thoughts
Buying an investment property involves more than just acquiring a home; it also involves incorporating this important financial choice into a larger financial strategy.
The knowledge and experience of tax experts, financial consultants, and real estate brokers guarantees that every facet of your investment—from the first deposit to continued management and the final sale—is tactically coordinated with your overall financial objectives.
WHAT OUR CLIENTS THINK OF US
Matt Clarke2024-08-04 My wife and I now have three investment properties, the last two with the help of The Investors Agency. There is no comparison between the stressful and anxious experience we had purchasing our first house alone, as opposed to the confidence we felt and professionalism shown by The Investors Agency with the purchase of our second and third investment properties. Their specialist knowledge, experience, communication skills and the resources at their disposal across the country made the whole process stress free and achieved great results. We purchased the second investment property in October 22 and used the equity in that home to comfortably purchase the third investment property in August 24. If not for The Investors Agency, I never would’ve considered the property type, value and locations. They explain their reasoning which is backed up by facts. Their advice has us on the path to financial freedom and we a very, very grateful. Thank you to Bobby, Josh, Georgie and the entire team at The Investors Agency. Gaurav Saxena2024-08-04 Great experience dealing with TIA, very informative and they work closely based on your needs. Little pricey but hopefully pays off with capital growth. Matt Lav2024-07-17 This was our first home purchase. My partner and I were a bit nervous about everything but TIA made everything smooth and easy to understand. Their process really is designed to take a lot of the load off you so you can go about your daily life and not be continuously stressing out about everything. We couldn’t be happier and can’t wait to celebrate with our next one hopefully soon! Ben Killen2024-07-07 An incredible service. An incredibly honest & professional team. Every part of the process is seamless. You wont find a better property purchasing experience both from an ease of use & a performance standpoint. The team is incredibly generous with their time, making sure to go over & above. A must for any Australian serious about building wealth sustainably. Ryan Johnston2024-06-24 We used TIA for our first investment whilst being based overseas. The professionalism and high level of communication was exactly what we needed not being locals or experts in the market. They provide a full end to end service and would highly recommend them to anyone else looking to invest in property. DJBors Channel2024-06-24 Awesome and straight forward . Efficient!!!! TIA is the best!!!! Rahul Ramachandran2024-06-09 working with Josh was a good experience. Highly recommend them with your property goals. joseph karipel2024-05-31 It's been great working with 'Investors Agency'. They're very earnest in their involvement with our customized needs to look around and get a suitable property for us. Nothing short of excellence!!Load more