Avoid These 5 Deposit Mistakes on Investment Property

Most investor deposits sit between 10% and 20% of the purchase price, but what you save and what you actually need are two different amounts.

If you're planning to buy a rental property in Mount Eliza or anywhere across Australia, the deposit conversation usually starts at 20%. That figure avoids Lenders Mortgage Insurance and gives you the widest range of investment loan options from banks and lenders. But depending on your borrowing capacity, the property type, and whether you're leveraging equity from another property, the actual amount you need upfront can shift.

Consider an investor looking to purchase an established two-bedroom unit near the Mount Eliza village centre. With a 20% deposit, they avoid LMI and qualify for better investor interest rates. But if they only have 10% saved in cash, they might still proceed by accepting LMI or by using equity from their owner-occupied home in Frankston to cover the shortfall. Both paths work, but the costs and loan structure differ significantly.

Why 20% is the common target but not always the requirement

A 20% deposit on an investment property keeps your loan to value ratio at 80%, which means you avoid paying Lenders Mortgage Insurance. LMI protects the lender if you default, and it can add thousands of dollars to your upfront costs or loan amount. At 10% deposit, LMI becomes a significant cost, sometimes reaching $10,000 to $20,000 depending on the property value and lender.

But some investors choose to pay LMI deliberately. If property values are rising or if rental income in the area is strong, entering the market sooner with a smaller deposit can outweigh the LMI cost. In our experience, investors with solid borrowing capacity and a clear property investment strategy often prefer to deploy less cash upfront and keep savings for renovations, holding costs, or a second purchase.

The other option is equity release. If you own your home or another property with available equity, you can borrow against that to fund the deposit on your investment property without needing to save the full 20% in cash. This approach still keeps your combined loan to value ratio under control, and it means you can move quickly when the right property appears.

Deposit plus costs equals the actual amount you need

The deposit itself is only part of what you need upfront. Stamp duty in Victoria varies by property value, and for an investment property there's no first home buyer concession to reduce it. Then there's conveyancing, building and pest inspections, lender valuation fees, and sometimes an upfront body corporate report if you're buying a unit.

As an example, an investor purchasing an established property might budget around 5% to 7% of the purchase price for these additional costs, on top of the deposit. If you're putting down 10%, you still need another 5% to 7% in accessible funds to cover settlement. That's where buyers can get caught short, especially if they've calculated the deposit but not the full transaction cost.

If you're using a lender that capitalises LMI into the loan amount rather than requiring it upfront, your cash requirement drops, but your total loan amount and ongoing repayments increase. Every investment loan application is different, and the way you structure the deposit and costs depends on your borrowing capacity, the rental income the property generates, and how the lender assesses your serviceability.

How lenders assess rental income when calculating your borrowing capacity

Lenders don't count 100% of the rental income when they assess how much you can borrow. Most will factor in around 80% of the expected rent to account for vacancy, maintenance, and body corporate fees. If you're buying in Mount Eliza, where the vacancy rate tends to be low and rental demand from families and professionals is steady, the property might generate strong rent, but the lender still applies that 80% haircut.

That means your borrowing capacity for an investment loan is often lower than it would be for an owner-occupied home, even if the rental income is solid. If you're planning to hold the loan on an interest only basis to maximise tax deductions, the lender will also assess your ability to service principal and interest repayments, even if you don't plan to make them during the interest only period.

This is where deposit size matters beyond just avoiding LMI. A larger deposit reduces the loan amount, which improves your serviceability and gives you access to better investor interest rates. If your borrowing capacity is tight, increasing your deposit from 10% to 15% can be the difference between approval and decline.

Using equity to fund your deposit without selling another property

If you own property already, you might not need to save a cash deposit at all. Equity release lets you borrow against the value of your existing home to fund the deposit and costs on your investment property. The way this works is the lender treats the equity in your current property as security, and you take out a new loan or increase your existing loan to access that equity.

In a scenario like this, an investor in Mount Eliza who owns their home outright or with a small mortgage remaining might have $200,000 in usable equity. They can borrow against that to fund a 20% deposit on a rental property without touching their savings. The lending structure usually involves a split loan, one secured against the owner-occupied property and one secured against the investment property, but the outcome is you can buy without needing cash in the bank.

The risk is you're increasing your overall debt, and if property values fall, your equity position weakens. But for investors focused on portfolio growth and building wealth through property, this approach accelerates acquisition and keeps cash available for other opportunities or holding costs.

What happens if you buy before understanding your actual borrowing capacity

Some investors lock in a property, pay the deposit to the agent, and then apply for finance only to discover they can't borrow enough to settle. This happens when rental income is lower than expected, when the lender applies a higher interest rate buffer in their assessment, or when other debts reduce serviceability.

If you're serious about buying an investment property, getting pre-approval before you make an offer removes that risk. Pre-approval confirms how much you can borrow, what deposit you need, and whether the lender will accept the rental income at the level you're expecting. It also locks in your borrowing capacity for a set period, usually three to six months, so you can search for properties with confidence.

Without that step, you're guessing. And if your guess is wrong, you either lose your deposit or you scramble to find a guarantor, a different lender, or additional funds to make up the gap.

How the 2027 CGT and negative gearing changes affect deposit decisions

From 1 July 2027, established residential properties purchased after 12 May 2026 will no longer qualify for the 50% capital gains tax discount or full negative gearing deductions against wage income. If you're buying an established property now, those changes apply to you. If you're buying a new build, you can choose between the old and new CGT arrangements, and negative gearing rules remain unchanged.

What this means for your deposit is that the tax benefits of holding an established property are lower than they were, which changes the return on investment and may influence how much you're willing to borrow. Some investors are now favouring new builds or commercial property, where the tax treatment hasn't changed. Others are increasing their deposit to reduce the loan amount and improve cash flow, knowing that negative gearing won't offset as much of the holding cost.

If you're still deciding between established and new, the deposit requirement is often similar, but the investment loan products available can differ. New builds sometimes attract slightly better investor interest rates or LMI discounts, depending on the lender.

Call one of our team or book an appointment at a time that works for you to talk through your deposit options, borrowing capacity, and how the recent tax changes affect your investment property plans.

Frequently Asked Questions