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April 30, 2021

How much deposit do I need for an investment property loan?

When searching for an investment property loan, one of the critical decisions you will need to make is your deposit amount. As it is the most significant contributing factor determining your monthly payments, you need to consider your various options carefully. As with any institutional financing, the more money you borrow, the higher your premiums. Other cost factors come into play when your deposit is less than 20 per cent of the property value. Before you decide, you need to weigh up your various options and align them with your financial goals.


Calculating your deposit amount

Financial institutions typically state the deposit you need to pay to secure your investment property loan facility as a percentage of the total property value. For example, if the property value is $100,000, a 20 per cent deposit would amount to $20,000, 5 per cent would equal $5,000 and so on.

However, when you calculate your deposit amount, it is also vital that you consider other loan and property costs. You will need to pay elements such as property taxes and stamp duty at the time of purchase. With so many various options, you must look at the different deposit scenarios while keeping these costs in mind.


Lenders Mortgage Insurance

If you decide to pay a deposit of less than 20 per cent on your investment property loan, the bank will add a Lenders Mortgage Insurance (LMI) cost to your loan amount. LMI, as the name suggests, is a security measure financial institutions take to reduce their risk of lender default. As with other financially-related mechanisms, the value of the LMI you will need to pay depends on the unsecured loan amount.

For example, if you put up a deposit of 20 per cent, your LMI cost will be far lower than the LMI of a 5 per cent deposit. The bank uses the full value of your investment property loan to determine your LMI, so that amount also factors into the final LMI cost. When you calculate your budget, keeping this additional cost in mind is vital in obtaining an accurate forecast of your potential expenses.


Cash flow considerations

The amount of your deposit directly affects the cost and affordability of your investment property loan. However, when deciding what amount you want to invest as a deposit, you need to consider the cash flow implications.

Having cash reserves immediately available is vital in any financial scenario. In your personal capacity, holding funds to deal with any unplanned events gives you the peace of mind you need during times of uncertainty. Cash gives you the flexibility you need to take advantage of immediate opportunities or mitigate any unforeseen expenses.

As you will need to part with your funds when you pay a deposit on an investment property loan, you need to weigh the pros and cons. It would help if you found the correct balance between your cash holdings and the extra monthly expense of loan repayments. The other factor that you need to consider is the tax you will pay. The interest charges on an investment property loan are tax-deductible.

For example, if you put up a 20 per cent deposit on a loan of $1,000,000, you need to part with $200,000. If the interest rate is 5.5 per cent, your monthly premiums will be approximately $4,542.31 for a loan of $800,000 over a 30-year term. If we adjust the scenario where you will reduce your deposit to 10 per cent, your monthly premiums will increase to $5,110.10, assuming the same interest rate and loan term. If we add an approximate LMI of $22,320 onto the $900,000 loan, your premiums increase to $5,172.10. Considering this scenario, it will cost you an additional $629.79 if you pay a 10 instead of a 20 per cent deposit. However, the upside is you still have cash of $100,000, and you will pay less tax.


Calculating how much deposit you need for an investment property loan

If we consider all the various factors that influence the interest rate you pay on an investment property loan, the deposit plays a significant role. Before deciding on the deposit amount, you need to weigh up your monthly premiums versus the cash you want on hand. In some scenarios, paying a smaller deposit can benefit you in the long term. It allows you to keep some money and pay less tax.

However, if your personal circumstances warrant a smaller premium, then a larger deposit is a viable alternative. As there are so many variations to consider, finding the right property finance solution can be challenging. As investing in property is a long-term commitment, discussing the various options with an expert is always recommended.


The right property finance solution, right HERE

At HERE Property, our mission is to unlock real value for our customers and the community’s long-term benefit. As independent mortgage brokers, we work directly with our clients to discover and access leading financial solutions. Our combination of unbiased advice and trusted industry connections allows us to provide meaningful counsel and unlock the best possible deals. With expertise across the finance and property sectors, we apply clear strategic thinking on market insights and careful execution based on each client’s financial and lifestyle goals.

If you want to access leading mortgage solutions and accelerate your return on investment, we would love to help. HERE Property offers almost 40 years of experience in the Perth market. Our expert team is 100% focused on simple, smart, and proactive property solutions.

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