How To Invest In Property Without a Large Deposit
One of the biggest hurdles new investors and home buyers face is coming up with a deposit to purchase a property.
If you’re a first home buyer looking at buying a property to live in, then there are a range of incentives that you can access to get you into a home with little or even no money down. However, for investors, it can be a little trickier, but oftentimes investing before you buy a home to live in can really set you up for the future.
As a general rule, lenders like to see a 20% deposit when you buy most types of residential property. That 20% deposit acts as a buffer to the lender in the event the borrower runs into financial troubles or if the property market was to drop.
The problem most investors face is that a 20% deposit, often equates to hundreds of thousands of dollars that an investor simply might not have. If you are looking to buy in either Sydney and Melbourne, you will quickly find that prices are sky high and coming up with the required deposit won’t be easy.
Fortunately, there are options for investors.
When investors start to think about investing they often look at their own backyard which is usually inner-city areas. If you look outside of the major cities, there are a number of lower-priced areas that will be far more accessible to investors, that also have higher yields.
For example, there are many regional cities areas around Australia where you can buy properties for under $300,000 that have strong 5%+ yields. This means that not only do you need to come up with a far smaller deposit, but the rental income you receive will likely cover the interest payments.
Fortunately, there are a number of DHA properties that are located in these types of areas, that offer a great combination of low entry point, plus strong consistent yields.
What is Considered ‘Genuine Savings’?
The idea of coming up with genuine savings is also one that is a bit of a grey area with lenders. The reality is that there a lot of people who come into a large sum of money that they would like to use as a deposit - but the bank won’t consider it as savings.
This might include things like a gift from Mum and Dad or an inheritance. It could even be something like the money received from selling your car. Fortunately, it’s possible to get this money classified as savings, by simply leaving it in your account for three months and adding to it along the way. Lenders will then consider that money as savings for a deposit.
There are also situations where you can take out a personal loan and then leave that money in your account and add to it in the same way and some lenders will accept that as a deposit. However, you will need to be able to service both the personal loan and mortgage. This is something to speak to your mortgage broker about.
The most obvious way of access finance to purchase a property without a large deposit is to pay Lenders Mortgage Insurance (LMI). LMI is basically an insurance policy that is there to protect lenders in the event a borrower can’t service their loan.
If you are looking to borrow over an 80% LVR, then LMI is generally applicable. This can be a significant payment (over $10,000) and increases depending on the loan size and LVR. However, given that it is an upfront cost, an investor should consider it as the cost of doing business to get into an investment. It’s possible to access loans with LVRs of 95% if you use LMI.
There are in fact a number of professions that are able to access higher LVRs without LMI, such as medical. So if you have a professional occupation with a good salary, it’s worth speaking to a mortgage broker.
If you own another property, whether an investment or PPOR, then you can access the equity in that property to use as a deposit for another purchase.
Assuming you can service the loan, you can effectively borrow 100% of the property value plus costs if you have the equity available. This works by ‘cashing out’ the equity you have in your other property.
This is a way you can not only buy one property but continue to invest to build a large portfolio.
Just because you might not have a large deposit, doesn’t mean you can’t invest. Investing in property and building wealth is vital to your long term financial future, so never accept a ‘no’ from a lender.
Share this page