No-deposit home loans are considered a thing of the past, so if you don’t have much cash to put towards an investment property, it pays to think outside the square.
Below we’ve compiled 5 ways you may be able to invest with little or no deposit:
- Use home equity in lieu of cash
Home values are rising fast, and if you’re a homeowner, you may have a surprising amount of home equity.
Equity is the difference between your home’s market value and the balance of your home loan. So, if your property is worth $500,000, and the balance of your mortgage is $200,000, you may have $300,000 in home equity. Some lenders will let you use this equity as a deposit on an investment property in place of cash savings.
- Low deposit loans
While lenders like to see a 20% deposit, many will accept far less. In fact, it could be possible to borrow up to 95% of a property’s value. This means you may only need a deposit of just 5% to buy a rental property, which can be a lot more achievable than 20%.
When your deposit is below 20%, the lender will likely ask you to pay lenders mortgage insurance (LMI). Your Mortgage Choice broker can let you know the possible LMI premium for your situation.
- Buying your first home as an investment property
Buying an investment property rather than an owner-occupied home could open up a much wider choice of properties and locations because you don’t need to focus on your personal needs or preferences. So, it could be a great way to buy in an affordable location and take that important first step into the market.
This strategy could mean missing out on financial incentives like the First Home Owner Grant. However, you will have the benefit of regular rental income and potential tax savings, both of which can make it a lot easier to manage your loan repayments.
- Guarantor loans
Parents can help their adult kids become investors, by agreeing to act as a guarantor for the investment loan. No cash changes hands – in most cases, mum and dad just need to have sufficient home equity to provide a guarantee in place of a cash deposit. Some lenders allow limited guarantees, letting parents specify how much of the loan they agree to guarantee, which can provide additional peace of mind.
- Buy property through a self-managed super fund
If you have reasonable savings in super, it may be worth thinking about buying a rental property through your own self-managed super fund (SMSF).
This is a big step, and it’s important to speak with a financial planner so you make an informed decision. Locate an experienced advisor, who can explain how SMSFs work and what’s involved in buying property through super.
The key take-out is that there is a variety of strategies that can help you buy an investment property even if you don’t have substantial cash savings – or if you want to preserve cash for other purposes. You can talk to your local Mortgage Choice broker for expert advice based on your circumstances.