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Curious about how much deposit you need for an investment property? It varies based on your approach: traditional savings or one of the 'no deposit' options. Discover three exciting strategies.
One of the most common questions that any first-time property investor asks is “how much deposit do I need for an investment property”. The answer is that it depends on whether you take the traditional approach to saving your investment property deposit or one of the ‘no deposit’ options instead.
First, let’s look at the traditional approach to borrowing for property investment. Investors using DPN finance most commonly have around 10% deposit, they then factor in costs on top of that.
To avoid paying lenders’ mortgage insurance (LMI) and to qualify for a lower interest rate. Lenders will require you to come up with a 20% deposit. LMI protects the lender if you can’t make your loan repayments.
Lender’s mortgage insurance can be up to 5% of the value of a loan, so the cost can be significant and should be avoided if possible. Qualifying for the lowest interest rate based on your specific financial situation will also save you a lot of money over the life of your investment property loan.
However, saving up a 20% deposit for an investment property can be time-consuming. The good news is that there are some smart property investment loan options available that allow you to quickly generate the necessary deposit to avoid the cost of LMI without affecting your cash flow.
The three main property investment options where you can both avoid the need to save a 20% deposit and avoid the cost of LMI are:
1. Taking out a family pledge loan
2. Using equity
3. Using your super
A family pledge loan for an investment property is where a person with a good credit rating (usually a family member) is contracted as a guarantor for the deposit on the loan (or even the entire loan amount). The guarantor can use the equity they have in another property as the security for the new investment property loan.
Obviously, both you and your guarantor would need to be comfortable with this arrangement to enter into it. Your guarantor may only be necessary until you have built up 20%equity in your investment property via your loan repayments and/or the property increasing in value over time.
If you are paying off (or you already own) a property (for example, your residential home), then you can use some of the equity that you have in that property as your upfront deposit. Your equity is the value of the amount of your property that you own. It is the market value less any amount owing on the property to a lender. For example:
There are three main property investment options that avoid saving a 20% deposit and also paying LMI.
If you have a self-managed super fund (SMSF), then you can use some or all of those funds as a deposit on an investment property. You can also take out the loan in your super fund’s name via a limited recourse borrowing arrangement to help protect your investment.
It’s important to understand that you can’t use this strategy if you don’t have an SMSF. In other words, you can’t use the funds you have in an industry, retail or employer super fund.
You can avoid the need to come up with a 20% deposit for an investment property loan and avoid the significant cost of lenders’ mortgage insurance (LMI) by using any of the following 3 strategies:
Many Australians have built substantial property investment portfolios by using these strategies. If you decide to join them, you will be able to start investing sooner so you can grow your wealth and secure your financial future.
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