Not everyone has enough cash in the bank to buy an investment property outright, so chances are you’ll need to take out an investment loan. While investment loans share a number of similarities with regular live-in home loans, there are a few key differences that set these types of mortgages apart. One of these factors is the minimum deposit needed for an investment loan.
Read on to learn more about how much you’ll need to get the ball rolling on an investment property.
What is an investment home loan?
Before we get into the nitty gritty about how much of a deposit you’ll need to fund your investment property, it’s worth understanding what an investment loan is and how it works.
In a nutshell, an investment home loan is a loan that’s specifically designed for borrowers looking to purchase an investment property. Many banks and lenders consider investment homes to be higher risk than live-in homes, so investment home loans will often come with higher rates and stricter terms to offset the additional risk. In some cases, banks will also account for this additional risk by requiring a higher minimum deposit amount.
How big should my deposit be?
When it comes to investment home loans, each bank or lender will have their own lending criteria that dictate how much they’re able to loan and ultimately how much of a deposit you’ll need.
Generally speaking, a safe deposit for a home loan for an investment property is at least 20% of the property’s value, which is based on a property valuation completed by the bank. That leaves you with a loan-to-value ratio (LVR) of 80%. If you have an LVR of more than 80%, meaning your deposit is less than 20% of the home’s value, you might be up for lenders mortgage insurance (LMI).
Interested in learning more about how much you could borrow to buy an investment property? Use our borrowing power calculator to estimate how much you could potentially borrow.
Having a big enough deposit is one thing, but it’s also important to make sure you can afford to cover all those other upfront expenses that also come with buying a property. This can include costs like:
- Stamp duty
- Building and pest inspections
- Land tax and title registration
- Legal or conveyancing fees
- Mortgage registration fees
- Insurances
- Moving expenses, like removalists and utility connections
These are just the expenses associated with purchasing an investment property. There are even more costs that come with owning a home that you’ll need to factor into your calculations too.
How to fund my investment home loan deposit
Once you’ve worked out how much of a deposit you’ll need to purchase an investment property, it’s time to figure out where exactly that money will come from. Most people will pull the funds for a deposit from one of two places - their savings or from home equity in an existing property.
Here’s how you can use these two sources to fund your investment property deposit.
Savings
Generally speaking, using savings is the most straightforward way to fund your deposit. Consistently setting aside a portion of your income can help you to save up the minimum amount over time. Plus, a demonstrated savings history also shows your lender that you have the capacity to manage your money responsibly and will be able to make your loan repayments.
With that said, saving money is often easier said than done, especially when you’ve got an existing mortgage to repay. It’s for this reason that many homeowners use their home equity to purchase an investment property instead of savings.
Home equity
If you already own a property, chances are you’ve built up equity over time as the property's value increases and you repay your home loan. In some instances, you might be able to refinance your existing loan to use this equity as a deposit for your investment property.
As a general rule, the maximum home equity you’re able to access is generally calculated as 80% of your home’s value minus the amount outstanding on your home loan. This gives you what’s known as usable equity, which you can then use to calculate your borrowing capacity for an investment property.
When it comes to tapping into your home equity to put it towards a deposit for an investment property you’ve got a couple of options. Some homeowners choose to take out a line of credit. This means that your lender will approve you to re-borrow funds up to a predetermined amount. One of the main benefits of getting cash out of your home loan using a line of credit is that you’ll only be charged interest on the amount that you borrow or use.
Alternatively, you might choose to release your equity as a lump sum into a bank account or an offset account. If you choose to access your equity this way, you’ll have to pay interest on that lump sum.
At the end of the day, the way you choose to fund your deposit for your investment property is up to you. It’s important to consider all of the risks and factors that come with purchasing an investment property. If you don’t feel confident navigating this process yourself, you might want to consider calling in a mortgage broker to help you.
This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.
This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.
Unloan is a division of Commonwealth Bank of Australia.
Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000.
^ Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. This discount is applied to each loan that you have with Unloan. If you have multiple loans (e.g. one investor and one live-in loan), they will each have a discount calculated based on when you settled each loan. Unloan may withdraw this discount at any time.
There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.
* Other third-party fees may apply. Government charges may apply. Your other lender may charge an exit fee when refinancing.
