Smart ways to approach investment property deposits

Most lenders ask for a minimum 10 per cent deposit when you're buying an investment property, though you'll often pay Lenders Mortgage Insurance on anything below 20 per cent.

Merrylands sits close to Parramatta and attracts tenants working in health, education, and retail across the western corridor. Units around Stockland Merrylands and along Merrylands Road appeal to young families and single professionals, while older freestanding homes near the railway line are often held by long-term landlords. Vacancy in the broader Cumberland area has remained under 2 per cent, which keeps rental income reliable when you're servicing a loan.

If you're deciding whether to buy your first investment property or add to an existing portfolio, the deposit size you need depends on how much you're borrowing, whether you're using cash or equity, and what margin the lender applies under current serviceability rules. The following sections walk through the calculations, the thresholds that trigger extra costs, and the way equity release works when you already own property.

How much deposit do you need for an investment loan in Merrylands

A 20 per cent deposit avoids Lenders Mortgage Insurance and gives you access to better interest rate discounts. Anything below that figure will usually trigger LMI, which is a one-off premium you can add to the loan or pay upfront.

Consider a buyer purchasing a two-bedroom unit close to the Stockland precinct. If the contract price sits within the current median range for units in Merrylands, a 20 per cent deposit would avoid LMI entirely and the borrower would qualify for a variable interest rate discount in the range most lenders reserve for loan-to-value ratios at or below 80 per cent. Drop the deposit to 10 per cent and the same buyer would pay LMI, typically several thousand dollars on a unit at that price point, and receive a smaller rate discount because the loan now sits at 90 per cent LVR. The difference in the monthly repayment and the upfront insurance cost can make a 20 per cent deposit worth the wait if you have the option to save or release equity from another property.

Some lenders will approve investment loans at 90 per cent LVR, and a small number go to 95 per cent if you meet specific income or employment criteria. Once you move past 80 per cent, LMI rises steeply and the interest rate discount shrinks, so the total cost of borrowing increases from two directions.

Using equity instead of cash for your deposit

You don't need to save cash if you already own property with available equity. A lender can use that equity as security for the new investment loan, which means you can buy without selling or withdrawing savings.

Equity is the difference between what your property is worth and what you owe on it. Most lenders will let you borrow up to 80 per cent of the value across all properties without paying LMI. In our experience, this approach works when your existing home has increased in value or you've paid down the loan over several years. A Merrylands owner-occupier with an older mortgage and a property now valued well above the original purchase price can often release enough equity to cover a full 20 per cent deposit on a second property, leaving the new loan at 80 per cent LVR and avoiding insurance.

The main constraint is serviceability. The lender will assess your ability to repay both loans at the same time, using a buffer of three percentage points above the actual interest rate and applying the debt-to-income cap introduced in February. If your total borrowing across both properties pushes you above six times your gross income, you may still be approved, but you'll fall into the lender's restricted allocation and some lenders will decline the application outright rather than use part of their limited capacity.

What changes from 1 July 2027 and how it affects your deposit decision now

Negative gearing rules and capital gains tax settings both change from 1 July 2027 under legislation that received Royal Assent in June. Properties purchased before 7:30pm on 12 May this year are grandfathered, which means they continue under the existing rules regardless of when you settle.

If you buy an established property in Merrylands after that date, any net rental loss will be quarantined from 1 July 2027. You can still offset those losses against other rental income or carry them forward to offset future rental income or capital gains on residential property, but you can't claim them against your salary. For buyers relying on negative gearing to reduce their tax each year, that change makes the holding cost higher unless the property produces a surplus or you buy a qualifying new build.

New builds remain eligible for negative gearing under the old rules, and they also retain the 50 per cent capital gains discount when you sell. Established properties purchased after the announcement date will use cost base indexation and a minimum 30 per cent tax rate on real gains instead of the discount. The deposit amount you need doesn't change, but the after-tax return on an established property will be lower for most buyers, which can affect whether the purchase makes sense relative to other investments or whether you're willing to wait and save a larger deposit to reduce the loan and improve cash flow.

There's a transition period until 30 June 2027, so properties bought between May and June next year can still be negatively geared under current rules until that date. After that, the new settings apply.

How lenders assess rental income when calculating your borrowing capacity

Lenders include rental income in your serviceability calculation, but they don't use the full amount. Most apply a haircut of 20 per cent to account for vacancy, maintenance, and periods between tenants. If the property generates income that covers the loan repayment after that reduction, you may be able to borrow more than you would on your salary alone.

A buyer looking at a three-bedroom house near Merrylands station might see weekly rent in line with the suburb median for that property type. The lender will take 80 per cent of the annual rent and add it to the buyer's employment income, then test the combined total against all existing debts and the proposed new loan. The buffer and debt-to-income cap still apply, so even with strong rental income, you can hit a ceiling if your total borrowing is high relative to what you earn. In that scenario, a larger deposit reduces the loan amount and can bring you back under the cap or within the lender's preferred range.

Interest-only repayments lower the monthly cost, which can help with serviceability in the short term. Most lenders offer interest-only terms of up to five years on investment loans, after which the loan reverts to principal and interest. If you're planning to hold the property long-term and build equity, principal and interest from the start will reduce the balance faster and give you more equity to use for the next purchase. If cash flow is tight or you're building a portfolio and want to preserve capital, interest-only can work for the initial period.

Costs beyond the deposit you need to budget for

Stamp duty in New South Wales is payable on investment properties at the standard rate, with no concessions for investors. You'll also cover legal fees, building and pest inspections, and any body corporate records or strata reports if you're buying a unit. Lender fees vary but typically include an application fee and a valuation fee, though some lenders waive one or both during promotional periods.

If you're borrowing above 80 per cent LVR, the Lenders Mortgage Insurance premium is usually the largest single cost after stamp duty. LMI is calculated on a sliding scale based on the loan-to-value ratio and the loan amount, and it protects the lender, not you, if you default. You can capitalise it into the loan, but that increases the amount you're borrowing and the interest you'll pay over time.

Ongoing costs include council rates, water rates, strata levies if applicable, landlord insurance, property management fees if you're using an agent, and repairs. All of these are claimable expenses when you complete your tax return, along with loan interest and depreciation on the building and fixtures. Maximising your tax deductions reduces the net cost of holding the property, though from July 2027 the ability to offset a loss against your wage will depend on when you exchanged contracts.

When to refinance or review your loan structure after purchase

Interest rate discounts and loan features vary between lenders, and what's available when you first buy may not be the most suitable option two or three years later. Refinancing can reduce your rate, release additional equity if the property has increased in value, or let you switch from interest-only to principal and interest without the automatic revert rate.

We regularly see investors in Merrylands and surrounds who took their initial loan through a single lender and haven't reviewed it since settlement. In many cases, a different lender will offer a lower rate or waive ongoing fees, and the cost of switching is recovered within the first year. If you've paid down the loan or the property has appreciated, you may also be able to drop below 80 per cent LVR and remove any remaining LMI liability on future top-ups.

Timing matters if you're planning to buy a second property. Refinancing before you apply for the new loan can increase your borrowing capacity by lowering your repayments or releasing equity you can use as a deposit. A loan health check will show whether your current structure is holding you back or whether it still fits your strategy.

The deposit you need for an investment property in Merrylands depends on whether you're using cash or equity, the loan-to-value ratio you're comfortable with, and how the lender treats rental income in their serviceability assessment. A 20 per cent deposit avoids Lenders Mortgage Insurance and improves your interest rate, but equity release from an existing property can cover that amount if you've built enough value over time. Legislative changes from July next year affect the tax treatment of established properties purchased after May, which makes the deposit decision part of a wider conversation about structure, timing, and long-term return. Call one of our team or book an appointment at a time that works for you.

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