How much deposit do I need to buy an investment property?
How Much Deposit Do I Need to Buy an Investment Property?
If you are a property investor, you are probably aware of the fact that sourcing a loan for investment properties is a different proposition to finding the right loan for a home in which you will be residing. Property investment loans come with different features and options, such as interest-only repayments, and you generally need to have a solid deposit. How much deposit depends on a number of factors.
Sourcing the deposit you need to buy an investment property
The minimum deposit you need for an investment property is usually 5% of the purchase price in genuine savings. The dollar amount will obviously vary depending on the cost of the property, and depending on the terms of the loan, you might not need to provide a cash amount.
If you do not have enough for a 5% cash deposit, consider using the equity in your other properties as security for your loan. This will eliminate the need for a cash deposit. Alternatively, you can have a family member, such as a parent or a sibling, guarantee your loan – as long as they have enough cash or equity to cover 20% of the purchase price of the investment property in a property they own in Australia. These options can make it easier and quicker for you to get started in property investment.
You should also allow sufficient funds to cover associated costs, such as stamp duty, borrowing fees, and legal fees for settlement.
Once you have answered the question of how much deposit do I need to buy an investment property, and have organised how you will fund it, you can start exploring the different types of repayment options, and issues such as the impact of rental allowance and negative gearing.
Understanding interest-only repayments
As an investor, you will undoubtedly be interested in maximising your cash flow. For this reason it can be useful to opt for interest-only repayments, whereby your repayments are for the interest portion of your loan only, and not the principal or the purchase price. You can choose to maximise your interest-free period for your loan by choosing to pay only interest for five years, or even 10 years.
Interest-only loans are advantageous also because interest repayments are tax deductible, while principal repayments are not. It can therefore be more financially effective to free up your funds by making interest-only repayments wherever possible. This can allow you to buy other properties, allow you to build up more equity in different properties, and possibly reduce how much deposit you need to buy an investment property, as you can use equity in existing properties to fund your deposit to buy another property.
Paying interest in advance
Certain types of property investment loans allow you to pay your interest in advance. This can provide tax benefits in cases where your annual income has been higher than usual, or where you are looking to offset a large capital gain in that year.
If you pay off your interest in advance, you might be able to access certain discounts in association with your loan.
The impact of rental income and negative gearing
Lenders typically calculate the permitted loan amount by taking into account rental income. They may also consider negative gearing. What this means is that you should compare different products to find the right product for your situation, and the investment property you want to purchase. This can make the difference between being turned down or approved for your loan.
How do I apply for a property investment loan?
If you are interested in applying for a property investment loan, contact ABC Mortgages today for a discussion. We can help you work out how much deposit you need to buy an investment property, determine your eligibility for a loan, and help you understand issues such as paying interest in advance, and the impact of rental allowance and negative gearing.