How do you know if you can afford an investment property?

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.

The traditional approach to borrowing for property investment is similar to a standard residential property purchase. This means most commonly to have around a 10% deposit, then factor in purchasing costs on top of that, such as stamp duty, legals etc.

To avoid paying Lender's Mortgage Insurance (LMI) and to qualify for a lower interest rate, banks and lenders will require you to come up with a 20% deposit. LMI protects the lender if you can’t make your loan repayments.

Alternatively, there other options to secure finance, including:

A guarantor or family pledge loan - where a family member (usually a parent) is contracted as a guarantor for the deposit on the loan (or even the entire loan amount).

Using equity - 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.

Purchasing in a Self-Managed Superannuation Fund - 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.

DPN recommends working with an experienced mortgage broker and a qualified accountant to help establish your financial position and individual requirements.