If you’re planning to increase your property holdings, it’s likely that you require an investment home loan. The question is, what amount of down payment is necessary for purchasing an investment property? We’ll answer this and related questions in the points below. But first thing’s first…
Do you actually need a deposit in order to buy an investment property?
Let’s assume you require an investment home loan before beginning your house hunt. While you might have been able to save up a 20% deposit for your first home, saving such a large amount can seem daunting with the addition of another mortgage. So the question remains, what is the actual amount of down payment that you need to purchase an investment property?
Generally, in order to avoid paying lenders mortgage insurance (LMI), you’ll require a minimum 20% deposit (equivalent to an 80% loan-to-value ratio (LVR)) for an investor home loan. LMI acts as an insurance policy that safeguards the lender in case the borrower becomes incapable of making their repayments on their home loan. Deposits of at least 20% are deemed to be less of a risk for lenders, which is why LMI only becomes applicable when your deposit is below 20%.
LMI expenses are generally computed as a percentage of the total loan amount, and can vary based on the loan type (owner-occupier or investor), the lender, and the LMI provider that you opt for. Determining your ability to afford an investment property deposit will depend on various factors, including your income, the property’s price, and your willingness to pay for LMI.
It’s worth noting that you may obtain an investment property with a deposit lower than the standard 20% by agreeing to pay LMI or being exempt from it. Certain groups, such as first home buyers and individuals belonging to specific professions, are often excluded from having to pay LMI.
What about the equity in your existing property?
As a property owner, utilising the equity of your present home to fund the deposit for your new property may be a viable option. It’s an ideal way to avoid saving a massive deposit, which might take years depending on the amount you intend to put down.
However, there are important aspects to contemplate prior to utilising your home’s equity as a deposit. Usually, you can only access up to 80% of the home’s value, minus the outstanding balance on your existing mortgage.
It’s critical to comprehend the repercussions before tapping into your equity. You might be compelled to make bigger monthly repayments on your loan as you will be chipping away at the principal you’ve settled. Consequently, more interest charges will be added to your loan.
Additionally, using your current home as collateral for your new property has risks that need to be taken into account too.
Other key considerations to keep in mind when saving for a deposit on an investment property
Although making the initial investment deposit is primary, buying an investment property requires consideration beyond this aspect. Along with placing a deposit, you also need to manage your mortgage payments and pay all the fees associated with buying and owning a property, while maintaining your existing lifestyle. So, what are the associated fees/other factors to keep in mind?
Borrowing Power – This represents the rough estimate of the amount you can afford to borrow on a home loan. It’s typically determined by deducting your expenses from your net income (post-tax).
Cash Flow – This comprises initial costs like legal fees and ongoing costs like insurance, rates, maintenance and repair expenses, plus your mortgage payments. Although tenants will likely cover some of these costs, there may be periods without tenants or unexpected expenses that disrupt your budget.
Stamp Duty – Although you could pay for stamp duty using your deposit, doing so might decrease your loan-to-value ratio (LVR), leading to the applicability of Lenders Mortgage Insurance (LMI). You’ll have to pay stamp duty upfront directly to your state or territory’s revenue office.
Speak to Perry Finance about your investment property loan needs today
Interested in purchasing an investment property in the near future? Speak to one of our friendly professionals today – we’ll work closely alongside you to ensure you achieve your investment goals. From commercial loans and residential loans to development finance and everything in-between, we know our stuff.