Proven Tips to Save on Investment Property Deposits

How Much Deposit Do You Need for an Investment Property?

Most lenders require a minimum 20 per cent deposit for an investment property loan, though you can borrow with as little as 10 per cent if you're prepared to pay Lenders Mortgage Insurance. At 20 per cent, you avoid LMI and typically secure better interest rates from lenders who view your application as lower risk.

Mornington's investment property market includes everything from older-style units near the foreshore to contemporary townhouses around the Village precinct. A buyer looking at a two-bedroom unit will need a different deposit strategy than someone purchasing a larger property with renovation potential. The loan to value ratio determines not only whether LMI applies but also influences the interest rate discount you're offered and the range of investment loan products available to you.

Consider a buyer who has $80,000 saved and is looking at property around the current median. At 20 per cent deposit, they're looking at properties in a specific price bracket. At 10 per cent with LMI, the same $80,000 opens access to properties at nearly double that value, but the upfront LMI premium could add $15,000 to $25,000 to their initial costs depending on the loan amount and lender. The decision isn't just about what you can afford today but what borrowing capacity the lender will approve based on rental income, your existing debts, and the serviceability buffer.

Can You Use Equity Instead of Cash Savings?

You can use equity from your existing home or another investment property as your deposit, often without needing to sell or save additional cash. Lenders assess the combined loan to value ratio across all secured properties to determine whether they'll approve the application and at what rate.

In our experience, many Mornington residents hold considerable equity in homes purchased years ago when values were lower. Releasing that equity to fund an investment property deposit means you're leveraging one asset to acquire another. The lender will value your existing property, calculate 80 per cent of that value (or sometimes up to 90 per cent if you're willing to pay LMI), subtract what you still owe, and the remainder is your available equity.

The lending structure matters. Some buyers establish a separate split loan or line of credit against their owner-occupied property to quarantine the investment borrowing, which keeps the interest on that portion tax deductible. Others refinance their entire home loan and draw additional funds. Either way, lenders apply the serviceability buffer and debt-to-income limits introduced in February this year to the total borrowing, not just the new loan. If your household income is $150,000 and you're already carrying $600,000 in owner-occupied debt, adding another $400,000 for an investment property puts you at a debt-to-income ratio of 6.67, which sits above the threshold where lenders must count you within their 20 per cent high-DTI allocation.

What Costs Should You Budget Beyond the Deposit?

Stamp duty, conveyancing, building and pest inspections, and loan establishment fees all sit on top of your deposit and typically add another 4 to 6 per cent of the purchase price. Stamp duty is the largest component and varies depending on the property value and whether you qualify for any concessions.

In Victoria, stamp duty on an investment property is calculated on the full value with no concessions available, unlike owner-occupiers or first home buyers. A property purchased at the Mornington median will attract stamp duty in the range of $20,000 to $35,000 depending on the exact price, plus conveyancing around $1,500 to $2,500, inspections near $600 to $1,000, and lender fees that vary from zero to $800. If you're borrowing above 80 per cent LVR, add the LMI premium. If you're purchasing through a buyer's agent, that's another 2 to 3 per cent plus GST.

These costs are separate from your deposit, and most cannot be added to the loan amount because lenders calculate LVR against the property's purchase price or valuation, whichever is lower. That means if you're aiming for a 20 per cent deposit to avoid LMI, you also need a separate cash buffer for settlement costs. Some lenders will allow you to capitalise the LMI premium into the loan if you're already paying it, but stamp duty and conveyancing must be paid upfront.

Does Rental Income Affect How Much You Can Borrow?

Lenders include rental income in their serviceability assessment but apply a discount, typically using 80 per cent of the expected rent to account for vacancy periods and maintenance costs. If a property is expected to rent for $600 per week, the lender will assess your income as though it generates $480 per week.

The rental assessment is based on a valuation or rental appraisal provided at the time of application, not on what you hope to achieve once the property is tenanted. Lenders also apply the 3 per cent serviceability buffer, meaning they assess whether you can afford repayments at the loan's interest rate plus 3 percentage points. At current variable rates, that buffer pushes the assessed rate to somewhere near 9 to 10 per cent, depending on your lender and loan features. That's the figure used to calculate whether your rental income, salary, and other income can cover all your debts, living expenses, and the new loan repayments.

For buyers in Mornington looking at holiday-style properties near the Esplanade or Main Street, rental income can be less predictable than for a standard residential tenancy. Short-term rental platforms generate higher nightly rates but lower occupancy across winter months. Most lenders won't assess short-term rental income unless you can provide a demonstrated rental history over at least 12 months, and even then, they'll apply a steeper discount or decline to include it altogether. If your investment loan application relies on that income to meet serviceability, you may need a different property or a larger deposit to reduce the loan amount.

Should You Choose Interest-Only or Principal and Interest Repayments?

Interest-only repayments lower your monthly outgoings and preserve cash flow, which suits investors focused on holding costs and tax deductions, while principal and interest repayments reduce your loan balance and build equity over time.

An interest-only period is typically available for up to five years on an investment property loan, after which the loan reverts to principal and interest unless you apply to extend. During the interest-only period, your repayments cover only the interest charged each month, so the loan balance stays the same. That means your tax deduction for interest remains consistent, and you're not tying up cash in equity that you can't easily access without refinancing. Many property investors prefer this structure in the early years of ownership, particularly if they're negatively geared and want to minimise out-of-pocket costs.

The trade-off is that once the interest-only period ends, your repayments jump because you're now paying down the principal over the remaining loan term. A $500,000 loan that was costing $2,150 per month interest-only at 5.2 per cent will jump to around $3,200 per month when it switches to principal and interest over 25 years. Lenders also apply a slightly higher interest rate to interest-only investment loans compared with principal and interest, often by 0.2 to 0.4 percentage points, because the loan is held at a higher balance for longer.

If your strategy involves selling the property within five to ten years or refinancing to access equity for the next purchase, interest-only can make sense. If you're planning to hold long-term and eventually pay down the debt, starting on principal and interest from day one reduces the total interest paid over the life of the loan and avoids the repayment shock later. Your mortgage broker in Mornington can model both scenarios against your goals and cash flow.

How Do Recent Tax Changes Affect Investment Property Buyers?

Properties purchased after 12 May this year will have rental losses quarantined from the 2027-28 income year onward, meaning you can't offset those losses against your salary unless the property qualifies as a new build. Properties held before that date, or under contract before that date, continue to allow full negative gearing.

The change applies to established residential investment properties only. If you buy a newly constructed dwelling, or a property where the number of dwellings on the land has increased compared with what was there before, you retain access to negative gearing against all income, including wages. The same applies to properties you already owned or had contracted to buy by 7:30pm on 12 May. For those properties, nothing changes.

If you're looking at an established villa unit or a renovated home in Mornington and you purchase after 12 May, any rental loss from the 2027-28 financial year onward can only be offset against income from other residential investment properties or carried forward to offset future residential property income, including capital gains when you sell. That doesn't prevent you from claiming deductions for interest, rates, insurance, and other holding costs, but it does limit where those deductions can be applied if your expenses exceed your rental income.

Capital gains tax treatment is also changing from 1 July next year. Gains accruing after that date will be taxed using cost base indexation and a 30 per cent minimum tax rate instead of the 50 per cent discount. For properties held before 1 July next year and sold afterward, gains are split between the old and new rules based on the portion that accrued in each period. New builds remain eligible for the 50 per cent discount. These are complex changes, and you should speak with your accountant or tax adviser before structuring your purchase.

What Happens If Your Circumstances Change After You Borrow?

If you're unable to meet your loan repayments due to illness, job loss, or another hardship event, you can request a variation to your loan under the National Credit Code, and your lender must respond within set timeframes. Options may include switching from principal and interest to interest-only, pausing repayments temporarily, or extending the loan term to reduce monthly costs.

Lenders are required to consider hardship requests and provide a written response within 21 days, or within 21 days of receiving information they've requested from you. That response must either agree to a variation or explain why the request has been declined and provide contact details for the Australian Financial Complaints Authority. The process applies to investment loans held by individuals, but not to loans held by companies or loans used wholly or predominantly for business purposes.

In our experience, lenders are more willing to negotiate if you notify them before you fall behind on repayments. Rental income can drop if a tenant leaves or the property sits vacant longer than expected, and if you're relying on that income to cover the mortgage, a few weeks without rent can put pressure on your cash flow. Switching to interest-only or extending the loan term by a few years can reduce the monthly repayment enough to keep the loan serviceable while you stabilise your situation. If the hardship is temporary, most lenders prefer that to moving toward default.

Call one of our team or book an appointment at a time that works for you. We'll review your deposit position, assess your borrowing capacity under the current serviceability rules, and connect you with investment loan products that align with your timeline and goals.

Frequently Asked Questions