How Much Deposit Do You Need for an Investment Property
Most lenders want 20 per cent for an investment property, though you can borrow with 10 per cent if you're willing to pay Lenders Mortgage Insurance. The difference between the two approaches isn't just about the deposit itself, it's about how much you can borrow, what your repayments look like, and whether you've got enough rental income to satisfy the bank's serviceability test.
Consider a buyer looking at a unit near Petersham station. If they're buying at the current median for units in the area and putting down 20 per cent, they avoid LMI entirely. That deposit comes from savings, equity in another property, or a combination of both. If they're going in with 10 per cent, they'll need to factor in an LMI premium that could add several thousand dollars to the amount borrowed, which means higher repayments and a slightly different serviceability picture.
The other thing to know is that lenders treat investor deposits differently to owner-occupier deposits. You can't use the First Home Owner Grant, and if you're relying on equity from your home, the bank will apply a lower borrowing limit against that equity than they would if you were upgrading to a bigger place for yourself.
What Counts as Genuine Savings for an Investor Deposit
Genuine savings means money you've held in your own account for at least three months. That includes savings accounts, term deposits, and offset accounts linked to your home loan. It doesn't include money from selling assets, gifted deposits from family, or proceeds from selling shares unless they've been sitting in your account long enough to meet the three-month rule.
Most lenders want to see at least 5 per cent of the purchase price coming from genuine savings, even if you're borrowing at 90 per cent and covering the rest with equity. If you're using equity from your home to fund the whole deposit, that 5 per cent genuine savings requirement still applies, and it's separate to the deposit itself. That catches a lot of people out because they assume equity covers everything.
In Petersham, where you've got a mix of young renters and established families, we regularly see buyers who've saved a chunk in an offset against their own home and then pull equity to top up the deposit. That works, but you still need to show the lender you've been putting money aside consistently.
Using Equity from Your Home to Fund the Deposit
If you own a property already, you can borrow against the equity to fund some or all of the deposit on an investment property. Equity is the difference between what your home is worth and what you owe on it. Lenders will generally let you borrow up to 80 per cent of your home's value without paying LMI, so if your place is worth more than you owe, that gap is what you can access.
As an example, say your home in the inner west is valued around the median for houses in Petersham and you owe less than half that amount. You could release enough equity to cover a 20 per cent deposit on a unit without needing to sell anything or dip into savings beyond the genuine savings requirement. The equity loan gets added to your existing home loan or set up as a separate split, and the repayments on that portion are tax-deductible because the borrowed funds are being used to buy an income-producing asset.
The downside is that your home loan balance goes up, so your repayments go up too. If you're planning to use rental income to help cover the new borrowing, make sure the numbers stack up under the bank's serviceability test. Lenders assess investment loans assuming the rent could drop or the property could sit vacant, so they don't count 100 per cent of the rental income when working out what you can afford.
LMI Premiums and How They Affect Your Loan Amount
Lenders Mortgage Insurance is a one-off premium you pay when you borrow more than 80 per cent of the property value. The premium is calculated on a sliding scale based on your loan amount and your loan-to-value ratio, and it gets added to the loan unless you choose to pay it upfront. On an investment property, LMI premiums are generally higher than they are for owner-occupiers at the same LVR.
The premium itself isn't deductible as a once-off expense, but if you capitalise it into the loan, the interest you pay on that portion of the loan is deductible because it's part of the borrowing used to acquire the property. That's a small consolation when the premium might be several thousand dollars, but it does mean the real cost is spread over the life of the loan rather than hitting you at settlement.
If you're borrowing at 90 per cent LVR on a property in Petersham, expect the LMI premium to be higher than it would be on the same loan for an owner-occupier. Some lenders cap investor LVR at 90 per cent, others will go to 95 per cent in limited circumstances, but the premium at that level makes it hard to justify unless you've got strong serviceability and a clear reason for not waiting another year to build a bigger deposit.
Interest Only Repayments and Deposit Strategy
A lot of investors choose interest-only repayments for the first few years to keep the monthly cost down and maximise the tax deduction. When you're paying principal and interest, only the interest portion is deductible. When you're paying interest only, the whole repayment is deductible, and your cash flow is lower, which can make it easier to hold the property through lean periods or fund further purchases down the track.
The trade-off is that your loan balance doesn't go down during the interest-only period, so you're not building equity through repayments. You're relying on capital growth and rental income to build wealth rather than paying down debt. That works in most markets most of the time, but if prices stagnate or rents drop, you're more exposed than you would be on a principal and interest loan.
Lenders generally offer interest-only periods of up to five years on investment loans, after which the loan reverts to principal and interest unless you apply to extend. Under current prudential rules, if your LVR is above 80 per cent and the interest-only period is longer than five years, the loan gets classified differently for capital purposes, which means most lenders won't offer it. If you're planning an interest-only strategy, factor in what the repayments will look like when the loan converts, because that's the figure the bank will use to assess your serviceability upfront.
Stamp Duty and Settlement Costs Beyond the Deposit
The deposit is only part of what you need upfront. Stamp duty on an investment property in New South Wales is calculated on the full purchase price with no concessions, and it's payable at settlement. For a unit in Petersham, stamp duty will run into the thousands, and that's on top of the deposit, LMI premium if applicable, and the usual settlement costs like conveyancing, building and pest inspections, and lender fees.
You can't borrow stamp duty separately, but you can include it in your overall loan if your LVR allows. If you're buying with a 10 per cent deposit and paying LMI, adding stamp duty to the loan will push your LVR higher and increase the LMI premium, so it's worth running the numbers both ways. Some buyers prefer to pay stamp duty from savings and borrow the rest, others capitalise everything and keep their cash for the next purchase.
Other costs to budget for include strata levies if you're buying into a block with body corporate, council rates from settlement, landlord insurance, and any immediate repairs or styling costs to get the place tenanted. If you're buying in Petersham, where a lot of the housing stock is older, factor in the possibility of needing to refresh carpet or paint before a tenant moves in.
Rental Income and Serviceability
Lenders don't count 100 per cent of the expected rent when they assess how much you can borrow. Most lenders apply a shading rate of around 20 per cent to account for vacancy and management costs, so if the property would rent for a certain amount per week, the bank only counts 80 per cent of that figure in their serviceability calculation. On top of that, they assess your ability to service the loan at an interest rate at least 3 percentage points above the actual rate, which is the current buffer set by APRA.
If you're relying on rental income to make the loan serviceable, you need to show the lender a rental appraisal from a licensed agent. The appraisal needs to be recent and specific to the property, not just a general market rent for the suburb. In Petersham, rental yields on units tend to be stronger than on houses because the purchase price is lower and the tenant pool is broad, but the bank will still shade the income and test your capacity to cover the shortfall from your own salary or other income.
If you're buying a property that's currently tenanted, the existing lease can be used as evidence of rental income, but the lender will still apply the shading rate and may ask for an appraisal to confirm the rent is in line with the market.
New Tax Rules from July 2027 and How They Affect Deposits
If you're buying an investment property now, you need to know that the negative gearing rules change from 1 July 2027 for properties purchased after 12 May 2026. Under the new rules, if your property expenses exceed your rental income, you can't offset that loss against your salary or other non-property income. The loss gets quarantined and can only be used against future rental income or future capital gains on residential property.
That doesn't change the deposit you need, but it does change the cash flow picture, especially in the first few years when interest costs are high and rental income might not cover everything. If you were planning to use negative gearing to reduce your taxable income and smooth out the holding costs, that benefit disappears for properties purchased under the new rules unless you're buying an eligible new build.
The capital gains tax treatment is also changing from 1 July 2027. Instead of the 50 per cent discount on gains for assets held longer than 12 months, you'll get cost base indexation and a minimum 30 per cent tax rate on real gains. For properties owned before 1 July 2027, gains are split, with the portion accruing before that date taxed under the old rules and the portion after that date taxed under the new rules. If you're weighing up whether to buy now or wait, the tax treatment is one of the variables worth discussing with your accountant, because it affects the long-term return and the cash you'll have available to fund further purchases.
Call one of our team or book an appointment at a time that works for you. We work with investment property buyers across Petersham and the inner west, and we can walk you through the deposit options, LMI costs, and serviceability requirements based on your actual situation and the specific property you're looking at.
Frequently Asked Questions
Can I use equity from my home as the full deposit for an investment property?
You can use equity to fund most or all of the deposit, but you'll still need to show at least 5 per cent of the purchase price in genuine savings held in your own account for at least three months. Equity covers the deposit itself, but lenders want to see you've been saving consistently as well.
Do I need a bigger deposit for an investment property than an owner-occupier loan?
Most lenders prefer a 20 per cent deposit for investment properties to avoid Lenders Mortgage Insurance, though you can borrow with 10 per cent if you're willing to pay the premium. LMI premiums are higher for investors than owner-occupiers at the same loan-to-value ratio.
How much does LMI cost on a 90 per cent investment loan?
The premium is calculated on a sliding scale based on your loan amount and loan-to-value ratio, and it's generally higher for investors than owner-occupiers. The cost can run into several thousand dollars and is usually capitalised into the loan rather than paid upfront.
Does rental income count toward my borrowing capacity?
Lenders count around 80 per cent of the expected rental income to allow for vacancy and management costs. They also assess your ability to service the loan at an interest rate at least 3 percentage points above the actual rate, so you need to be able to cover the shortfall from your own income.
What other costs do I need to budget for beyond the deposit?
You'll need to cover stamp duty, conveyancing, building and pest inspections, lender fees, and any LMI premium if applicable. If you're buying a unit, also budget for strata levies, council rates from settlement, landlord insurance, and any repairs or styling needed before tenanting.
