Can You Buy an Investment Property with Less Than 20% Deposit?

Yes, purchasing an investment property with a smaller deposit is possible, but this often comes with fresh costs. Lenders Mortgage Insurance (LMI) is generally needed when your deposit is less than 20%. While LMI protects the lender (not the borrower), it can add a significant expense to your loan, either as an upfront cost or incorporated into your repayments.

Some lenders may allow deposits as low as 10%, but stricter lending criteria generally apply. For example, you might need a strong credit history, stable income, or existing equity in another property. Also, interest rates may be higher for loans with lower deposits.

Standard Deposit Requirements

When purchasing an investment property, most lenders require a minimal deposit of 20% of the property’s purchase price. This change safeguards the lender, reducing their risk if the property does not perform as expected or if the borrower encounters financial difficulties.

For example, if you’re looking to buy an investment property worth 500,000, a 20% deposit equates to 100,000. While this is the standard, there are situations where you might be able to buy with a smaller deposit. Still, doing so often involves trade-offs, such as higher interest rates or additional costs like Lenders Mortgage Insurance (LMI).

Can You Use Equity as a Deposit?

However, if you already own property, you might be able to use your equity as a deposit for your investment property. Equity is the difference between your property’s current market value and the amount you owe on your mortgage. For example, if your home is worth 600,000 and you owe 300,000, you have 300,000 in equity.

Many lenders allow you to leverage your equity instead of saving a cash deposit. This approach can be particularly appealing if you’re keen to enter the property market quickly but don’t have much savings. Still, evaluating the risks is essential, as using equity increases your total debt and repayments.

What Factors Determine the Deposit Amount?

Several factors influence the size of the deposit required for an investment property.

• Lender Policies: Each lender has unique requirements based on their risk tolerance and lending criteria. Some may allow lower deposits under certain conditions.
• Loan-to-Value Ratio (LVR): This is the percentage of the property value you want to borrow. A lower LVR (e.g., 80%) requires a larger deposit, while a higher LVR (e.g., 90%) might incur LMI.
• Credit History: Borrowers with a strong credit score and stable financial history are more likely to secure favourable terms, including smaller deposit requirements.
• Property Type and Location: Some lenders view certain property types, similar as apartments or rural properties, as a higher threat, which may bear a larger deposit

Additional Costs to Consider

The deposit is just one part of the financial puzzle when buying an investment property. Do not forget to account for

• Stamp Duty: This varies depending on the property’s position and value.
• Legal and Conveyancing Fees: These cover the legal work of transferring power.
• Inspection Costs: Building and pest inspections are pivotal to identifying potential issues.
• Ongoing Costs: These include property management fees, maintenance, and insurance.

Budgeting for these expenses ensures you’re financially prepared beyond just the deposit.

Get Started with WhiteAlpaca Finance!

Ready to take the next step toward property investment? WhiteAlpaca Finance is here to guide you through every stage of the process. From understanding deposit requirements to finding the best loan options tailored to your needs, we make investing in property simple and stress-free.

Contact us today to unlock the door to your property investment journey. Let’s turn your goals into reality!

Frequently Asked Questions

Can I borrow 100% of the purchase price?

It’s rare, but some lenders might approve 100% financing if you have a guarantor or sufficient equity in another property.

What’s Lenders Mortgage Insurance (LMI)?

LMI protects the lender when your deposit is less than 20% of the property price. The cost depends on the loan amount and deposit size.

Can I use a personal loan for my deposit?

Some lenders allow this, but it may affect your borrowing capacity due to increased debt obligations.

Are there government incentives for investment properties?

Most government incentives, like first-home buyer grants, don’t apply to investment properties.

How can I save for a deposit faster?

Setting a budget, cutting unnecessary expenses, and exploring high-interest savings accounts or investment options can accelerate your savings.