Investment Property Deposits: The Pros and Cons

Most lenders require a minimum 10 per cent deposit for an investment property, though some will accept less with additional security or if you're leveraging equity from an existing property.

The deposit requirement for investment loans sits higher than the 5 per cent floor available to some owner-occupiers, and lenders apply different serviceability tests when assessing how much you can borrow. Understanding both the upfront costs and the borrowing implications matters when planning your next purchase.

How Much Deposit Do You Actually Need?

A 10 per cent deposit is the typical minimum for investor lending, though you'll also pay Lenders Mortgage Insurance if your deposit sits below 20 per cent. LMI premiums vary by loan amount and deposit size, and the cost is capitalised into the loan or paid upfront at settlement. At a 10 per cent deposit, LMI can add several thousand dollars to your total borrowing.

Some lenders will accept an investor deposit as low as 5 per cent where you have a strong income history or can provide additional security, such as equity in your home. Others cap investor lending at 90 per cent loan to value ratio regardless of circumstances.

Consider a buyer with $80,000 in usable equity in their owner-occupied home in Truganina. They can apply that equity as deposit and security for an investment property purchase without needing to save additional cash, though the lender will still assess total debt serviceability across both loans. Stamp duty and other settlement costs still need to be covered, either from savings or by borrowing up to 105 per cent of the property value where the lender permits.

Using Equity From Your Home as Deposit

Equity release is one of the more common ways investors fund a deposit in Melbourne's western suburbs. If your home has increased in value since you purchased it, or you've paid down the loan, you may have accessible equity.

Lenders typically allow you to borrow up to 80 per cent of your home's value without needing LMI, which means any equity above that 80 per cent threshold can be used as deposit for your investment property. In a scenario where your home in Point Cook is valued at $600,000 and you owe $400,000, your equity position is $200,000. The lender will allow you to borrow up to $480,000 against that property, leaving $80,000 in usable equity before triggering LMI.

That $80,000 can serve as deposit and cover costs on an investment purchase. The lender will assess your ability to service both the existing home loan and the new investment loan together, applying the serviceability buffer and investor interest rate to the new lending.

Serviceability Tests for Investment Loans

Lenders assess investment loan applications differently to owner-occupier loans. They apply a higher interest rate margin, reduce the amount of rental income they include in your serviceability calculation, and since February this year, apply a debt-to-income limit that restricts high DTI lending to no more than 20 per cent of new investor loans each quarter.

Rental income is typically shaded by 20 per cent to account for periods of vacancy, maintenance costs and property management fees. If the property you're purchasing is expected to generate $450 per week in rent, the lender will include only $360 per week in your income assessment. The remainder is considered a cost buffer.

The serviceability buffer requires lenders to assess your capacity to repay the loan at a rate 3.0 percentage points above the actual product rate. If the variable investor rate is 6.5 per cent, the lender tests your repayment capacity at 9.5 per cent. That test applies to all new lending and has been in place since late 2021.

Debt-to-income limits introduced in February restrict lending to borrowers with total debt six times or more than their gross annual income. If your household income is $120,000 and your total debt, including the proposed investment loan, exceeds $720,000, the lender may decline the application or reduce the loan amount to stay within their quarterly limit.

Interest Only Versus Principal and Interest

Investment loans can be structured as interest only for an initial period, typically up to five years, which reduces the monthly repayment and may improve cash flow in the early years of ownership. Interest costs on an investment property loan are tax deductible where the property is rented or genuinely available for rent, so many investors prefer to minimise principal repayment during the loan term and redirect surplus cash to other investments or to paying down non-deductible debt such as their home loan.

After the interest only period ends, the loan reverts to principal and interest repayments. The repayment amount increases at that point because you're paying down the loan balance as well as covering the interest cost. Some investors refinance or extend the interest only term before reversion, though lenders have tightened their approach to long-term interest only lending under the capital requirements set out in the prudential framework.

Structuring the loan as principal and interest from the start reduces the total interest cost over the life of the loan and builds equity in the property sooner, which can be useful if your strategy involves using that equity for further purchases.

Stamp Duty and Other Upfront Costs

Stamp duty on investment property purchases in Victoria is calculated at the standard residential rate, with no concessions or exemptions available to investors. The cost varies by purchase price and can be calculated in advance using the State Revenue Office schedule.

Other upfront costs include conveyancing, building and pest inspections, loan application fees if charged by the lender, and LMI where your deposit sits below 20 per cent. Settlement costs on an investment property in Tarneit or Wyndham Vale typically add between $8,000 and $15,000 to the total amount required at settlement, depending on the purchase price and deposit size.

Some lenders allow you to capitalise these costs into the loan, lifting the total borrowing to 105 per cent or in limited cases 107 per cent of the property value. Borrowing your costs increases the ongoing interest expense and may trigger higher LMI premiums, but it reduces the cash required upfront.

Pros and Cons of a Smaller Deposit

Putting down a smaller deposit, such as 10 per cent instead of 20 per cent, allows you to enter the market sooner and retain cash for other purposes, including maintaining an emergency buffer or funding further investments. The main cost is LMI, which is a one-time premium but can be significant depending on the loan size.

A smaller deposit also means higher ongoing borrowing costs because the loan amount is larger. If you're borderline on serviceability, borrowing an additional $50,000 to cover LMI and settlement costs may push you outside the lender's acceptable DTI range, particularly where your rental income is shaded and tested at the buffered rate.

A larger deposit reduces your borrowing, eliminates or reduces LMI, and improves your serviceability position. It also leaves you with a lower loan to value ratio, which may give you access to better interest rate discounts from some lenders. The downside is the delay while you save, and the opportunity cost if property values or interest rates move during that period.

What If You're Buying in Melton or Cobblebank?

Lenders assess properties in growth corridors such as Melton and Cobblebank on the same serviceability criteria as established suburbs closer to the city, though some lenders apply postcode restrictions or require larger deposits in areas they consider higher risk. Those restrictions are not universal, and most major lenders will support investment purchases in Melbourne's west without additional conditions.

Rental demand in the western suburbs remains solid, supported by affordability relative to inner and middle-ring suburbs, proximity to employment hubs in Werribee and the planned future transport links. Lenders will assess the rental income based on a valuation and market rent appraisal completed at the time of application, and they'll apply the same 20 per cent shading regardless of location.

If you're considering a property in a newer estate, confirm with your broker that the lender accepts security over that development. Some lenders exclude certain postcodes or estates while they assess supply and resale activity in the area. Those restrictions are more common in regional locations than in metropolitan Melbourne, but they do appear occasionally in high-supply growth corridors.

Refinancing to Release Deposit for Your Next Purchase

If you already own an investment property and want to purchase another, refinancing your existing loan may release additional equity you can use as deposit. Property values across the western suburbs have lifted over the past several years, and if your loan balance has reduced through principal repayments, the gap between what you owe and what the property is worth may be enough to fund your next deposit without needing to save further.

Refinancing also allows you to review your loan structure, move from a fixed rate that no longer suits your circumstances, or consolidate debt to improve your overall serviceability position. Lenders will assess the refinance application using current serviceability rules, including the DTI limits introduced in February, so your borrowing capacity may differ from when you first took out the loan.

Call one of our team or book an appointment at a time that works for you. We'll review your equity position, run the serviceability numbers across the lenders we work with, and walk you through the deposit options that suit your circumstances and your next purchase.

Frequently Asked Questions