How to Build an Investment Property Deposit in Melbourne

Most Melbourne investors begin with the same question: how much do I actually need to have ready before I can buy a rental property?

The answer depends on whether you're using cash savings, tapping into equity from your home, or a combination of both. Either way, understanding what lenders expect and how to structure your deposit will determine whether you can move quickly when the right property appears or whether you need another six months to prepare.

How Much Deposit Do You Need for an Investment Property?

Most lenders require a minimum 10 per cent deposit for an investment loan, plus enough to cover stamp duty and other upfront costs. If you borrow with less than 20 per cent deposit, Lenders Mortgage Insurance will be added to your loan amount or paid upfront.

Consider a buyer purchasing a unit in Brunswick at the current median. With a 10 per cent deposit, they would also need to budget separately for stamp duty, conveyancing, building and pest inspections, and lender costs. LMI at that deposit level could add several thousand dollars to the total cost, depending on the loan amount and lender.

The alternative is to wait until you have a 20 per cent deposit. You avoid LMI, your borrowing capacity improves slightly, and your interest rate may be lower. The trade-off is time. Waiting another year to save an extra 10 per cent means you also miss 12 months of rental income, potential capital growth, and the ability to claim interest and other holding costs as tax deductions.

Using Equity From Your Home to Fund the Deposit

If you already own property, you may be able to use the equity in your home to fund the deposit and costs for an investment property without needing to save additional cash.

Equity is the difference between what your property is worth and what you owe on it. Lenders typically allow you to borrow up to 80 per cent of your home's value without needing LMI. If your home is worth more than what you owe, the unused portion of that 80 per cent can be redirected toward the deposit on an investment property.

In a scenario where a homeowner in Coburg has a property valued at $850,000 with a mortgage of $400,000, they have $450,000 in equity. At 80 per cent LVR, the maximum they could borrow against the property is $680,000. That gives them access to $280,000 in usable equity, more than enough to fund a deposit and costs on a nearby investment property without touching their savings.

This approach requires careful structuring. The loan against your home and the investment loan are assessed together when determining your borrowing capacity. Both your rental income and your current income are considered, but vacancy rates, property management costs and a serviceability buffer are also factored in.

What Lenders Count as Genuine Savings

If you're not using equity and plan to use cash savings instead, lenders will want to see that your deposit has been held in your accounts for at least three months. This is known as genuine savings.

Acceptable sources include funds held in a savings account, term deposit, or offset account. Lenders will review your bank statements to confirm the funds weren't borrowed or gifted immediately before application. Some lenders will accept a gift from a parent or family member as part of your deposit, but it usually can't make up the entire amount unless you're also contributing genuine savings of your own.

Sale proceeds from another property, shares, or other assets are generally accepted without needing to meet the three-month requirement, as long as you can provide documentation showing where the funds came from.

If your deposit includes a combination of genuine savings, a gift, and equity, the lender will assess each component separately and determine whether the overall structure meets their policy.

Fixed Rate, Variable Rate, or a Split

Once your deposit is sorted, the next decision is how to structure the loan itself. Investment loans are available on variable rate, fixed rate, or a combination of both.

Variable rate loans allow you to make extra repayments without penalty and usually come with offset accounts, which can reduce the interest you're charged if you keep surplus cash in the account. The rate can move up or down over time, which affects your repayments and your borrowing capacity if you refinance or buy again.

Fixed rate loans lock in your repayment amount for a set period, typically one to five years. They provide certainty but limit flexibility. Most fixed loans don't allow offset accounts, and if you repay early or refinance during the fixed period, break costs may apply.

A split loan gives you both. You might fix half your loan for three years to lock in part of your repayment, and leave the other half on a variable rate with an offset account attached. That structure works well for investors who want some protection from rate rises but still want access to flexibility and redraw.

Interest Only or Principal and Interest

Most investment loans offer the option to make interest-only repayments for a set period, typically up to five years. After that, the loan reverts to principal and interest unless you apply to extend the interest-only term.

Interest-only repayments are lower than principal and interest, which improves your cash flow in the short term and may increase your borrowing capacity. The interest portion is tax deductible, so keeping the loan balance higher for longer can increase your deductions each year.

The downside is that your loan balance doesn't reduce during the interest-only period. You're not building equity through repayments, only through any capital growth in the property. If the property doesn't increase in value or if the market softens, you may find yourself in a position where you owe more than the property is worth when you eventually sell.

Principal and interest repayments are higher, but they reduce your loan balance over time. That gives you more equity to draw on if you want to buy another property down the track. It also reduces your risk if property values stagnate.

Your choice depends on your broader strategy. If you're planning to buy multiple properties over the next few years, interest-only can help you maximise your borrowing capacity now. If this is your only investment property and you're focused on long-term wealth rather than portfolio growth, principal and interest may suit you better.

How Rental Income Affects Your Borrowing Capacity

Lenders include rental income when calculating how much you can borrow for an investment property, but they don't count all of it. Most lenders apply a shading factor of around 80 per cent to account for periods when the property may be vacant or when rent isn't being paid.

If the property you're buying is expected to generate $500 per week in rent, the lender will typically assess your income at $400 per week. That figure is then added to your salary and any other income, and your total borrowing capacity is calculated from there.

The lender will also apply the serviceability buffer, currently set at 3.0 percentage points above the loan product rate for borrowers using an ADI. That means even if your investment loan has a rate of 6.0 per cent, the lender will assess whether you can still afford the repayments if the rate were 9.0 per cent.

If your borrowing capacity is tight, small changes to your deposit size, the rental income, or the interest rate type can make the difference between being approved and being declined.

Call one of our team or book an appointment at a time that works for you. We'll review your deposit, your borrowing capacity, and your options across a range of lenders to help you structure your investment loan in a way that fits your situation and your plans for the property.

Frequently Asked Questions