A deposit is the initial large payment – a portion of the total purchase price – made upfront when purchasing an investment property.
However, deposits are more than just the first step in buying an investment property. They are a fundamental component that can influence the entire financing landscape of your investment journey.
In this article, we’ll guide you through the key roles that deposits play in property investment. We’ll also explore effective strategies to help you save up for your deposit and maximise your financial outcomes.
The Importance of Deposits
Deposits are crucial to investment property financing for the following reasons:
- Obtaining Better Loan Terms and Rates: Lenders use deposits to assess and mitigate the risk associated with lending money for property investment. As an investor, you’ll typically need to provide a deposit of around 20% of the property’s purchase price. However, some lenders may accept as little as 10% or even 5%, depending on various factors, including your financial standing and the loan’s terms.
Note that the larger the deposit you provide, the less money the lender needs to provide, which lowers their risk. Lower deposit often necessitate the purchase of Lenders Mortgage Insurance (LMI), which protects the lender in case you default on the loan. On the other hand, if you secure a larger deposit, you not only reduce the amount you need to borrow but also potentially gain access to better loan terms and interest rates, making your investment more cost-effective in the long run. - Building Equity: When you make a deposit on an investment property, you’re essentially purchasing a portion of the property’s equity upfront. This initial investment reduces the amount you need to borrow and establishes your equity in the property from the start. As you continue to pay down your mortgage, your equity – the portion of the property you actually own – increases. Moreover, if the property appreciates in value over time, your equity grows even more, potentially boosting your financial stability and providing opportunities for further investment.
- Increasing Approval Chances: By presenting a lower risk and demonstrating substantial financial commitment to the property through a large deposit, you position yourself as a more attractive borrower, which can facilitate a smoother, quicker approval of your loan.
Strategies to Save for Your Deposit
Here are some tips to help you accumulate the necessary funds for your investment property loan application:
- Set a Clear Savings Goal: Determine the exact amount needed for your deposit based on the average requirement of 20% of the property’s purchase price. Adjust your savings goal based on the specific market and type of property you’re interested in.
- Manage Your Budget: Develop a detailed budget that tracks your income and expenses. This way, you can adjust your spending to increase your saving capacity. Identify areas where you can cut costs and reallocate that money into your savings for a deposit.
- Open a Dedicated Savings Account: Establish a separate bank account for your deposit. This helps avoid the temptation to spend the money and makes it easier to track your progress.
- Automate Your Savings: Set up automatic transfers from your checking to your savings account immediately after each paycheck. This ensures regular savings contributions and reduces the likelihood of spending the money elsewhere.
- Increase Your Income: Consider ways to generate more income, such as by freelancing, getting a part-time job, or starting a side business. Having additional income can significantly help you save faster for your deposit.
- Utilise Unexpected Income: Direct any unexpected income, such as tax refunds, bonuses, or gifts, straight into your deposit. These amounts can make a big difference over time.
- Reduce High-Interest Debt: Pay down high-interest debts like credit card balances. This reduces your monthly expenses and frees up more money for savings.
- Get Pre-Approved for a Mortgage: Getting pre-approved for a mortgage can clarify your budget and show you exactly how much more you need to save. This can also make you a more attractive buyer when you are ready to make an offer.
- Invest to Grow Savings: If you have a longer timeline, consider investing your savings in low-risk investment options that may offer better returns than a savings account. However, for your safety, make sure to consult with a financial professional before making any investment decisions.
- Explore Alternative Financing: Consider other financing options, such as using the equity in your home as part of your deposit. Speak with a financial advisor or mortgage broker to understand how this might work in your situation.
Final Thoughts
Deposits are a foundational aspect of securing investment property loans, influencing not only the terms and rates you receive but also your overall financial stability and growth potential in real estate. To save for a deposit, you’ll need discipline, strategic budget management, and sometimes, even creative financial solutions.
If you need more insights and advice on deposits, consider consulting with a mortgage broker for tailored solutions that can help you achieve your investment goals.
