Should you put down a 10% or 20% deposit on an investment property? Your broker may tell you 20% gets a cheaper rate and no lenders mortgage insurance (LMI). At face value that looks like the better option. But investing is about getting the best return on every dollar you put in, so the answer depends on more than the rate. This guide compares both options using a worked $650,000 example, so you can see how the cash required, the LMI, the interest rate and the return on invested capital actually change.
How Much Deposit Do You Need for an Investment Property?
Most Australian lenders require a deposit of 10 to 20% of the purchase price for an investment property, plus stamp duty and buying costs. A 20% deposit avoids lenders mortgage insurance (LMI), while a 10% deposit roughly halves the cash you need upfront but adds LMI to the loan. Many investors also use equity in an existing property instead of cash savings to fund the deposit.
The right amount depends on your cash position, borrowing capacity, and what you plan to do with the remaining funds.
Our Worked Example: A $650,000 Investment Property
These are illustrative figures from the strategy tool we use with clients. Your own rates, LMI and costs will differ, so use your broker’s quotes.
| Input | Figure |
|---|---|
| Purchase price | $650,000 |
| Funds available | $270,000 |
| Rate at 10% deposit | 6.2% |
| Rate at 20% deposit | 5.9% |
| LMI at 10% deposit | ~$13,000 to $14,000 |
10% vs 20% Deposit: What the Numbers Show
| 10% Deposit | 20% Deposit | |
|---|---|---|
| Cash needed | ~$92,000 | ~$157,000 (~$65K more) |
| Interest rate | 6.2% | 5.9% |
| LMI | ~$13,000 to $14,000 | None |
| Monthly holding cost | ~$2,100 | ~$1,900 |
| Return on invested capital (2 years)* | 52.6% | 42.7% |
*Assuming 20% growth over two years. That is an assumption in the model, not a forecast.
At face value, 20% looks better: a cheaper rate and no LMI. But the deposit does not change how much the property grows. It only changes how much cash is tied up and how much interest you pay. The same growth on less cash produces a higher return on that cash.
Run the downside too. Try the same numbers at 0% or 5% growth. Leverage works in both directions, and a smaller deposit means higher repayments and more exposure if the cash rate rises or the market softens.
Why Investors Use Leverage, and When It Backfires
Leverage means borrowing the bank’s money to hold a bigger asset. If a $650,000 property grows by 5%, you benefit from the growth on the full value, even though you only put in the deposit. That is why many investors choose the lower deposit.
It also means a 90% loan leaves less buffer if prices stall or your rates rise. Know how much of a hit you could handle before you choose.
Is LMI Worth Paying on an Investment Property?
Whether that trade is worth it depends on what else you would do with the cash you keep.
What Is the Cash Buffer Worth?
In this example, the 10% option costs about $200 more a month to hold than the 20% option, and you keep about $65,000 in the bank.
If you would use that cash for your next deposit, an emergency buffer or another investment, many investors find the extra monthly cost worth it. If the cash would sit idle, the lower rate on a 20% deposit may suit you better.
The approximate cash difference between a 10% and 20% deposit on a $650,000 property - available for a next deposit, buffer, or other investment.
When a 20% Deposit Makes Sense
Interest Only vs Principal and Interest
| Interest Only | Principal & Interest | |
|---|---|---|
| Monthly cost (this example) | ~$2,000 to $2,100 | ~$2,500 to $2,700 |
| Loan balance | Stays the same during IO period | Reduces over time |
| IO period | Usually 1 to 5 years, then reverts to P&I | No IO period |
| Rate | Typically a fraction higher than P&I | Generally lower |
| Tax deductibility | Interest is deductible | Interest deductible; principal repayments are not |
In a principal and interest loan, close to 80% of the early repayments still go to interest, even at a lower rate.
Some investors keep their monthly cost as low as possible so they can save for the next deposit. Others prefer to pay the loan down. Shabab’s view is that early in a portfolio, you generally want to give the bank as little money as possible but he is clear this is not advice for any specific person.
How to Choose
There is no single right answer. Let the numbers show you the pros and cons, then decide which pros match your goals and which cons you cannot tolerate.
We build the loan strategy with your mortgage broker or refer ours and the ownership structure with your accountant. You can see how that fits into our full process on our services page.
If you want to model your own deposit options, talk with our team.
Frequently asked questions
Can you buy an investment property with a 10% deposit?
Yes, with most lenders, but you will usually pay LMI. On a $650,000 purchase at a 10% deposit, LMI can range from $13,000 to $14,000 depending on the lender and the loan amount.
Can LMI be added to the loan?
Often yes. Some lenders let you capitalise LMI into the loan so you pay it gradually rather than upfront, but interest then accrues on it, which costs more over the life of the loan.
Is LMI tax deductible on an investment property?
Generally yes, as a borrowing expense claimed over five years or the loan term if shorter. It is not deductible on a property you live in. Confirm with your accountant
How much deposit do I need for an investment property?
Most lenders require 10 to 20%, plus stamp duty and buying costs. The right amount depends on your cash position, borrowing capacity and what you plan to do with the remaining funds.