Buying an investment property can be an effective way to build wealth over the long term, but before comparing properties and potential rental returns, there is one practical question to answer: how much deposit for an investment property do you actually need?

A 20% deposit is a common target because it can reduce the amount you need to borrow and may help you avoid lenders mortgage insurance. However, you do not necessarily need an exact 20% deposit in every situation. The amount required will depend on your lender, financial position, the property you are purchasing and the structure of your investment loan.

If you already own a home, cash savings may not be your only option. Depending on your circumstances, using equity as a deposit could allow you to access some of the value already built up in your home.

This guide looks at how investment property deposits work, what else you should budget for and the different ways existing homeowners may be able to fund their next property purchase.

Do You Need An Exact 20% Deposit For An Investment Property?

No. A 20% deposit is a useful benchmark, but it is not a universal requirement for every investment property loan.

For example, if you were buying an investment property for $800,000:

• A 20% deposit would be $160,000
• The remaining $640,000 would generally need to be financed
• This would produce an 80% loan to value ratio, or LVR

Some lenders may consider loans with a smaller deposit, although this generally means borrowing a greater proportion of the property's value. Depending on the lender and loan structure, this can result in additional costs and lending requirements.

A larger deposit can also have advantages. Because you are borrowing less, your ongoing interest costs and repayments may be lower. It can also provide a greater equity buffer if property values fall.

Your deposit is only one part of an investment loan application. Lenders will generally also consider factors such as your income, existing debts, expenses and ability to meet repayments.

What Is Lenders Mortgage Insurance?

Lenders mortgage insurance, usually shortened to LMI, protects the lender rather than the borrower if a borrower cannot repay their home loan.

LMI is commonly payable when a borrower takes out a loan above 80% of a property's value, although individual lender requirements can vary. It may be paid upfront or added to the loan, depending on the lender.

This is one reason many property buyers aim for a 20% deposit. Reaching an 80% LVR or lower can potentially avoid the additional expense of LMI.

How Can You Save For An Investment Property Deposit?

If you are building your investment property deposit through savings, having a clear target can make the process easier to manage.

The right strategy depends on your income, expenses, existing debts and intended purchase price, but there are several practical steps that can help.

Work Backwards From Your Property Budget

Rather than saving without a specific goal, start with an indicative property budget.

If you are aiming for an $800,000 investment property and want a 20% deposit, for example, your deposit target would be $160,000.

You would then need to add your estimated acquisition costs to determine the overall amount you may need before buying.

If your goal was to save $160,000 over four years, that would equate to an average of approximately $40,000 per year before taking into account any interest earned on your savings.

The numbers will be different for every investor, but working backwards gives you a clearer target and timeframe.

Keep Your Deposit Separate From Your Emergency Funds

It can be tempting to put every available dollar towards the deposit. However, purchasing an investment property creates ongoing financial obligations.

Your property could require an unexpected repair. A tenant could leave. Insurance premiums, council rates or other property expenses could increase.

Keeping a separate financial buffer means you are less reliant on credit or additional borrowing when an unexpected expense occurs.

Your deposit target should therefore take into account not only what you need to purchase the property but also what you want to retain after settlement.

Reduce High Interest Debt Before Applying

Existing personal loans, credit cards and other debts can affect household cash flow and may also be considered when a lender assesses an investment loan application.

Reducing expensive debt before buying can potentially strengthen your financial position while freeing up additional money for your deposit.

It can also help you understand your actual capacity to manage another significant financial commitment rather than focusing solely on accumulating the deposit.

Factor Higher Interest Rates Into Your Budget

An investment property should ideally remain manageable across a range of circumstances rather than only under today's conditions.

When developing your budget, consider what happens if:

• interest rates increase
• rental income is lower than expected
• the property is vacant for a period
• maintenance costs increase
• your personal income changes.

A lender will make its own assessment of your borrowing capacity, but undertaking your own financial stress testing can help you determine whether the investment still makes sense for you.

Investment properties generate rental income, but owners remain responsible for loan interest and costs such as council rates, insurance and repairs.

What Upfront Costs Should You Also Save For?

Your investment property deposit should not be the only amount included in your savings target.

Depending on the property, location and financing arrangement, additional upfront expenses can include:

• transfer duty or stamp duty
• conveyancing and legal costs
• building and pest inspections
• lender or loan establishment fees
• valuation expenses
• lenders mortgage insurance, where applicable
• property and landlord insurance
• other settlement related expenses.

The exact amount can vary considerably between states, property values and individual transactions.

This means an investor targeting a 20% deposit should generally avoid assuming that having exactly 20% of the purchase price in cash means they are ready to settle. Buying costs should be budgeted for separately.

Can You Use Equity As A Deposit For An Investment Property?

For existing homeowners, using equity as a deposit can provide another pathway to purchasing an investment property.

Your home equity is broadly the difference between the current value of your home and the amount you still owe against it.

For example, if your home were worth $1.5 million and your mortgage balance were $500,000, you would have approximately $1 million in gross equity.

However, that does not necessarily mean you can borrow the entire $1 million.

When a traditional lender allows you to access equity, it will generally consider the resulting LVR as well as your income, expenses, debts and ability to service the additional borrowing.

How Does Using Home Equity As A Deposit Work?

A common approach is to borrow against some of the equity in an existing home and use those funds towards the deposit and purchasing costs of an investment property.

The investment property itself may then be financed using a separate investment loan.

This can allow an established homeowner to invest without waiting until they have accumulated the entire deposit in cash.

However, accessing equity through additional conventional borrowing generally means taking on more debt. Interest is charged on the additional amount borrowed and repayments need to be incorporated into your household budget.

It can also increase the amount secured against your existing home, so it is important to understand the consequences if your financial circumstances or property values change.

How Much Usable Home Equity Could You Have?

Your total equity and your usable equity are not necessarily the same amount.

Consider an illustrative example:

Home value: $1,200,000
Existing mortgage: $500,000
Gross home equity: $700,000

If a lender were prepared to lend up to 80% of the property's value, the total lending secured against that property would be $960,000.

After deducting the existing $500,000 mortgage, this would leave up to $460,000 in potentially accessible equity.

That does not mean the homeowner would automatically qualify to borrow $460,000. The lender would still assess borrowing capacity, serviceability, the property and its own lending criteria.

This distinction is important when planning an investment property purchase. Having substantial equity does not automatically mean you can or should borrow all of it.

How HomeFlex Can Fund Your Investment Property Deposit

For eligible homeowners, HomeFlex provides another way of accessing equity from an owner occupied home.

Rather than charging conventional loan interest with monthly repayments, HomeFlex allows eligible homeowners to access funds from their home with no compounding interest and no monthly repayments. In return, LongView receives an agreed share of the home's future capital growth when the arrangement is repaid. HomeFlex can be repaid when you sell, refinance or choose to buy LongView out.

Under the approach contemplated in this article's brief, eligible homeowners may be able to use funds accessed through HomeFlex towards an investment property deposit. Whether this works for a particular purchase will depend on HomeFlex eligibility and the requirements and approval of the lender providing the investment property finance.

HomeFlex eligibility and the amount available depend on factors including your existing home, its value, location and current mortgage. LongView arranges an independent valuation before presenting an offer.

Access your home equity and use it as a deposit for investment property

How Does HomeFlex Differ From Borrowing Against Your Equity?

The key difference is how the cost and repayment structure works.

With traditional equity borrowing, you generally increase the amount of debt secured against your home. Interest is charged and repayments usually need to be made throughout the loan term.

HomeFlex does not charge compounding interest and does not require monthly repayments. Instead, the amount ultimately payable is determined under the HomeFlex agreement, which includes an agreed share of the change in your home's value.

You also remain the sole owner of your home. LongView secures its interest through a mortgage or caveat rather than taking ownership of the property.

This difference can be particularly relevant when buying an investment property because a conventional investment loan already creates an ongoing repayment commitment. Accessing the deposit through another interest bearing loan can add another repayment obligation to the household budget.

HomeFlex has different long term costs and considerations. If your home increases substantially in value, the share of future capital growth payable to LongView can be significant. It is therefore important to compare the potential long term cost, cash flow implications and risks of each option rather than focusing only on monthly repayments.

Unlock your home equity with HomeFlex

Does Negative Gearing Affect How Much Deposit You Need?

Not directly.

Negative gearing describes a tax position where the deductible expenses associated with a rental property are greater than the income generated by the property, resulting in a rental loss.

Subject to the relevant tax rules and your personal circumstances, that rental loss may be deductible against other income.

Negative gearing does not itself change the purchase price or automatically reduce the deposit required by your lender.

It should therefore not be treated as a substitute for having an adequate deposit or sufficient cash flow to manage the investment.

Tax outcomes are also only one component of a property investment decision. An investor may still need to fund the difference between rental income and property expenses during the year, including loan repayments and unexpected costs.

Because tax outcomes depend on your individual circumstances, consider obtaining independent tax advice before relying on negative gearing as part of an investment strategy.

Get Your Investment Property Deposit Ready With LongView

There is no single deposit percentage that is right for every property investor.

A 20% deposit remains a useful starting point because it can reduce the amount you need to borrow and may help you avoid lenders mortgage insurance. But your real target should also account for purchasing costs, an emergency buffer and the ongoing cost of owning an investment property.

If you already own a home, you may also have options beyond saving the entire deposit in cash.

Traditional equity borrowing can allow you to release some of the equity in your home, although it generally increases your borrowings and repayments. For eligible homeowners, HomeFlex offers a different structure, with no compounding interest or monthly repayments in exchange for an agreed share of future capital growth.

Whichever approach you consider, the important question is not simply “How much deposit do I need?” It is whether the property, deposit, finance structure and ongoing costs work together in a way that is appropriate for your circumstances.

You can start by checking how much home equity you may be able to access and whether HomeFlex is suitable for your situation.

Check your HomeFlex eligibility