If you’re looking to expand your property portfolio, chances are you’re in need of an investment home loan. Before you search for the perfect home, you might need to search for your home loan options first.
For your first home, you might have saved for that hefty 20% deposit. But with another mortgage to add to the mix, saving this much might seem like a near impossible feat. So, how much deposit do you really need to purchase an investment property?
Typically, you’ll need at least a 20% deposit (an 80% loan-to-value ratio (LVR)), for an investor home loan if you want to avoid paying lenders mortgage insurance (LMI). At loans.com.au you could put down as little as a 10% deposit to buy an investment property, but you’ll need to pay LMI.
LMI is an insurance policy that protects the lender in the event that the borrower is unable to make their repayments on their home loan. Generally, borrowers with deposits of at least 20% are considered less likely to default on their loans which is why LMI is only payable when your deposit is less than 20%. The cost of LMI is calculated as a percentage of the loan amount and can differ based on the type of loan (owner occupier or investor), the lender, and the LMI provider you go through.
To understand how LMI can affect your home loan rate, let’s look at three quick examples using loans.com.au’s current investor home loan rates. In these examples, you’re purchasing a $500,000 property and you’re looking to make monthly payments (with principal and interest) over 30 years.
If you’re looking at a 70% LVR, you’d need to save $150,000 for the deposit. The cheapest rate available to you right now is the Smart Booster Investor Bundle (1.99% p.a. with 2.71% comparison rate), which would require you to make monthly repayments of $1,846.
For an 80% LVR, you’d need a deposit of $100,000. The cheapest rate available right now is also the Smart Booster Investor Bundle (1.99% p.a. with 2.71% comparison rate). This would mean you also need to make monthly payments of $1,846.
If you have a 90% LVR, you’d still need to put down a significant $50,000 for the property’s deposit. The cheapest rate available would be the Green Investor (2.34% p.a. with 2.63% comparison rate), and you would need to pay $1,934 per month. This is without considering LMI.
Related: Find out more about how LVR works
So, the question of whether you can afford an investment property deposit will come down to you and factors like your income, the price of the property, and whether you’re willing to pay for LMI.
However, you might find that you can get your hands on an investment property with a lower deposit than the standard 20% if you’re willing to pay LMI/you’re exempt from paying LMI. People eligible under first home buyer schemes and in certain professions often don’t need to pay LMI.
If you’re already a property owner, you might be able to tap into the equity in your current home to put down a deposit on your new property. This can be a great way to avoid saving for a massive deposit, which could end up taking years depending on how much you’re looking to put down.
However, there are some considerations you’ll need to make before using your home equity as a deposit.
Typically, you’ll only be able to access 80% of the home’s value, minus the current balance of your loan. Let’s say you own a home that’s valued at $500,000 and your outstanding debt on your mortgage is currently $300,000. In this scenario, you’d have $100,000 in equity available ($400,000 - $300,000 = $100,000).
Before tapping into your equity, it’s important to understand the implications of doing so.
You will likely end up needing to pay larger monthly instalments on your current loan, as you will be chipping away at the principal amount you’d paid off. This means you’ll be charged more in interest.
Additionally, if you choose to use your current home as security on your new property, this comes with risks that should be considered.
Related: Learn more about using home equity to buy another property
Part of the reason it can be difficult to buy any home is saving up for the deposit. It can be a long process for some people, especially if you’re opting to save for a 20% deposit. Often, property investors decide to buy with a smaller deposit, rather than taking time to save up.
This is because the interest portion of your monthly home loan repayments can be tax-deductible, as well as any fees associated with the loan. For example, if you accrued $15,000 interest over a year, and paid $500 in various monthly fees, you could claim $15,500 on home loan repayments for that financial year.
It’s important to note you can only claim on the interest portion of your loan, not the principal (the amount you borrowed). Want to know more about tax benefits of property investment, read our guide on tax deductions you can claim on an investment property.
While the initial deposit will be front of mind, purchasing an investment property will come with more considerations than coming up with the deposit. You’ll need to be able to cover your mortgage payments, as well as all the fees involved in buying and owning a property, whilst still maintaining your current lifestyle.
A big factor in how much you’ll need to save is your borrowing power. Your borrowing power, also known as your borrowing capacity, is the estimated amount you can afford to borrow for a home loan. Generally, this is calculated as your net income (or post-tax income) minus your expenses. This is what will determine how much you can afford to borrow to purchase an investment property, which will also indicate how much you need to save for your deposit.
Another thing to consider is your cash flow, which will also need to account for the costs involved in buying and owning a property. This will include initial costs, like legal fees, and ongoing costs like rates, insurance, repairs and maintenance plus your mortgage. While you’ll likely get tenants in to cover some of these costs, there might be periods when the property is vacant or an expense comes up that throws off your usual budget. Your cash flow is important to ensure you can handle owning an investment property in the best and worst of times.
One of the costs involved in buying a property is stamp duty, which will often end up costing thousands of dollars. While this can be taken out of your deposit, this could lower your LVR which means LMI might come into play. Stamp duty needs to be paid directly to your state or territory’s revenue office, and it needs to be paid upfront. So, you’ll likely need to have money aside to cover this cost.
Planning on buying an investment property soon? At loans.com.au we offer a range of low interest investment home loan options with great features.
Apply online or speak to one of our Australian based loan specialists who will take care of all the paperwork for you.
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