Investment Property Deposit: How Much Do You Really Need?

Real estate investment is one of the most popular ways to grow your wealth in Australia. But one of the very first hurdles you need to overcome is the investment property deposit. It’s a major factor that impacts how quickly you can enter the market and the financing options available for you. The good news is that with the right knowledge, tools, and strategy, securing the deposit for your investment property is a breeze.

In this blog, we’ll lay out everything you need to know about the investment property deposit. From how much you actually need to how to get there, so you can start your property investment journey with utmost ease and confidence!

What Is an Investment Property Deposit?

Let’s start with the basics. An investment property deposit is the upfront payment you make when purchasing a property. It’s usually a percentage of the property’s purchase price, and it shows the lender that you’re financially committed. The higher your deposit, the better your chances are of securing favourable loan terms (such as a lower interest rate). So, if you’re eyeing that dream investment, property, understanding how much deposit you need is your first step.

How Much Deposit Required for Investment Property?

In Australia, the most common deposit required for investment property is around 20% of the property’s purchase price. So, if you’re looking at a $500,000 property, that’s about $100,000 to save up. But don’t stress, the deposit amount can change depending on a few things, like your financial situation, the lender, and the type of property. If you don’t have the full 20% ready, don’t worry! Some lenders will let you get away with as little as 10% down, though you might have to pay Lender’s Mortgage Insurance (LMI), which we’ll discuss in a moment. 

Pros & Cons: Large vs Small Deposits

When deciding how much to put down, you’ve got a choice: go for a large deposit or keep it smaller. Both have their benefits and drawbacks, so let’s break it down:

Large Deposit (20% or more)

Pros:

• Lower Loan-to-Value Ratio (LVR): The bigger your deposit, the less you need to borrow. This means less risk for the lender, which translates into better loan terms for you.
• No Lender’s Mortgage Insurance (LMI): If you can come up with 20% or more, you can avoid paying LMI, and that could actually save you thousands.
• Lower monthly repayments: The more you put down, the smaller your loan, meaning lower repayments and more flexibility with your finances. Sounds amazing, right?

Cons:

• Takes longer to save: The main downside is that saving up 20% can take a while, especially when property prices keep going up.
• Opportunity cost: That money you’re saving for your deposit could be used elsewhere for investments with higher returns. 

Small Deposit (Less than 20%)

Pros:

• Get into the market sooner: If you’re eager to invest, go for a smaller deposit. It will allow you to buy a property faster, even in a market that’s on the rise.
• More leverage: A smaller deposit means you’re borrowing more, which gives you the chance to build a larger property portfolio down the line.

Cons:

• Lender’s Mortgage Insurance (LMI): If your deposit is less than 20%, you might have to pay LMI, which can add a pretty hefty cost to your loan.
• Higher monthly repayments: A larger loan means higher repayments, which can put a strain on your budget AND affect your cash flow.

How Deposit Size Affects Your Investment

Your deposit size really impacts how your investment will perform over time. The larger your deposit, the lower your loan repayments, which means less financial pressure and more room to reinvest or handle any unexpected costs.

But if you’re just itching to get started with a smaller deposit, that can work too, especially if you’re focused on long-term growth. Just keep in mind that the smaller the deposit, the higher your monthly repayments, which might limit how much you can save for other investments.

Can You Buy with Less Than 20% Deposit?

Yes, it’s possible to buy with less than a 20% deposit. In fact, some lenders offer loans that require just a minimum deposit for investment property of 10%. But, there’s a catch: you’ll usually have to pay Lender’s Mortgage Insurance (LMI) if your deposit is below 20%. 

LMI is an extra cost, but if you want to enter the market sooner, it might be worth considering investment property financing options that let you borrow more. Just make sure to weigh the cost of LMI against the potential growth and returns from your investment. 

Lenders’ Loan-to-Value Ratio (LVR) Explained

The Loan-to-Value Ratio (LVR) is an important thing to understand when it comes to property deposits. Simply put, it’s the ratio of how much you’re borrowing versus the value of the property.

A high LVR means you’re borrowing more, which increases the risk for lenders. On the flip side, a low LVR means you’re borrowing less, which is less risky for the lender.

For example, let’s say you’re looking to buy a $500,000 property and you’ve saved a $100,000 deposit. That would give you an LVR of 80%. Most lenders prefer an LVR of 80% or lower, which is why a 20% deposit is considered the sweet spot.

If your LVR goes over 80%, you’ll likely need to pay Lender’s Mortgage Insurance (LMI), which can bump up your upfront costs.

How to Save for Your Investment Property Deposit

Saving for a property deposit might seem like a big task, but with a clear plan in place, it’s totally achievable. Here are some tips to help you save up:

• Set clear savings goals: Make sure you know exactly how much you need for your deposit and set a realistic target. The more specific you are, the easier it is to stay on track.

• Open a high-interest account: Maximise your savings by putting them in an account that offers a higher interest rate. It’s a simple way to make your money work for you while you save.

• Cut back on unnecessary expenses: Take a closer look at your current spending habits. Are there areas where you can cut back, like eating out less or reducing subscriptions? Every little bit helps.

• Boost your income: If you can, consider taking on a side hustle or finding other ways to increase your income. It doesn’t matter if it’s freelance work, tutoring, or selling unused items; any extra cash flow is welcome. 

By following these steps, you’ll reach your property deposit goal in no time!

Using Equity and Alternative Deposit Options

If you already own property, you might be able to use the equity in your current home or investment property to fund your deposit. It lets you tap into the value of your existing property for your next investment, which can be a total game-changer! 

Now, there are also other options that you can consider, like gifts from family members, guarantor loans, or even using a self-managed superannuation fund (SMSF). These strategies can help you secure the deposit you need without having to wait ages to save up the full amount.

Practical Examples 

Let’s break it down with an example. If you’re considering a property worth $600,000, a 20% deposit would be $120,000. But let’s say you’ve only got $60,000 saved up, don’t worry, with LMI, you could still get the loan. The catch is you’d need to factor in the extra cost of LMI. If LMI costs $8,000, your total upfront cost would be $68,000. It’s a bit more, but still manageable. 

How Much Deposit Should You Aim For?

While a 20% deposit is ideal to avoid LMI and snag better loan terms, the right deposit for your investment property depends on your financial situation. It’s a good idea to aim for at least 20% if you can. But if you want to jump into the market sooner, a smaller deposit could work too, especially if you’re okay with covering the LMI.

Conclusion

Understanding the investment property deposit is one of the first steps in your property investment journey. If you’re saving for a larger deposit or looking into other options, having a clear strategy will help you make smarter, more informed decisions. And with the right financing, you’ll be well on your way to building a strong property portfolio.

At InvestorKit, we’re here to help you every step of the way. From figuring out your deposit requirements to finding the right investment property for your future. 

Looking to have a chat about how to start investing in property or want to explore the best financing investment property options? 

Get in touch with our experts today.