Should You Do a 10% or 20% Deposit When Buying an Investment Property?

Dilleen Property Group 2021

Should you do a 10% deposit or should you do a 20% deposit when you're buying an investment property? Should you pay lenders mortgage insurance? How can you leverage your portfolio from this?

There’s a million different scenarios when it comes to investing in property, so I’ll break it down in simple terms.

10% Deposit

If you were to buy a property for $300 000 with a 10% deposit here are the figures:

• $30,000 deposit

• $10,000 stamp duty

• $7,000 miscellaneous expenses, legal fees, pest and building inspections and lender's mortgage insurance (LMI)

All up, this comes to $47,000. In this scenario the lender's mortgage insurance is roughly $4,000 for the purchase.

20% Deposit

While on the other hand, a 20% deposit would look like this:

• $60,000 deposit

• $10,000  stamp duty

• $3,000 miscellaneous expenses, legal fees, pest and building inspections (no LMI)

This comes to $73,000 in total.

When looking at these figures, it’s important to note that LMI is a tax deduction. People tend to steer away from paying LMI because they learn from their parents or people with less experience to avoid LMI. However, I don’t believe it is something we need to avoid.

If I was starting again I would personally lean towards doing a 10% deposit. There are a couple different reasons why that is.

If you’re just getting started with a lower income or it’s hard for you to save, maybe you've got kids, or maybe you've got heavy expenses but you want to get in the property market. I would do a 10% deposit in this situation, especially if you have trouble saving because the longer it takes you to save a 20% deposit, the more time you are leaving for the market to go up during that time.

For people out there that are on a smaller wage with a small amount in savings, and you just want to get your foot in the door, a 10% deposit is a great way to get started. My first ever deposit I did when I was 18 going on 19 years old was a 10% deposit and it was the best decision I ever made, just to get my foot in the door.

The Risks With Using A 20% Deposit 

It’s important to note the risk factor involved in putting down a 20% deposit. You must think about the possibilities that may arise, so having a buffer there is necessary. If you decide to go with the 20% deposit ($73,000 down) and you only have $73,000 saved up you won’t have that buffer there. Whereas if you go with the 10% deposit ($47,000 down) you will have almost a $30,000 buffer there. This means that you've got $30,000 left in your bank account, and it also leaves you with the opportunity to purchase a second property.

To me, it's about having control over your own money. I want to be in control of my money, my equity and my cash flow. If you over capitalise on one property and put all your money into it when you only have a certain amount, it can leave you exposed.

For certain properties it is good to do 20% deposit, however, for people just getting started buying their first property and are looking to grow their investment portfolio, strategically I would start off with a 10% deposit.

How To Leverage When Using A 10% deposit

If you use the right strategies when purchasing investment properties, you can leverage your portfolio quickly. Going back to the previous example, if you purchased that $300 000 property with a 10% deposit, you could use that extra $30,000 left over to purchase a second property. From here, you can release the equity from those two properties to purchase another two properties and so on. This strategy can get you from zero to eight properties faster than you would expect. There are many different ways you can leapfrog and accelerate your property portfolio, releasing equity is just one of those strategies.

Quick Tip

A helpful tip on how to calculate LMI, is by using an LMI calculator on Google and using the ‘Gen Worth’ website. This is where you can type in the purchase price of property that you're buying and it will calculate how much the LMI is going to be based off your loan to value ratio.

Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser. 

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