An investment property with no deposit

Buying an investment property is the start of a retirement plan for a lot of individuals and is the first big step to financial independence when retired. However saving money for a deposit while paying the mortgage on your own home is tough. Heck, saving a deposit when you're living with Mum and Dad can be hard. If you have your own house though and you've paid off a bit of the mortgage or the value of your house has risen compared to what you bought it for you may not need that deposit.

The trick to buying an investment property without the need to save for a deposit is to use equity. Similar to when someone uses a guarantor to buy a property, you're using the spare value from one house to buy another. Assume you bought your house for $700,000, your mortgage was originally $560,000 but it's been a couple of years and you've been paying it down aggressively and now the loan is only $400,000. You have $300,000 in equity. You can't borrow the whole $300,000 but you can borrow up to 80% of the value (700,000x0.8=560,000) without many questions from the bank. You can borrow more but it gets tricky and there are more costs involved including LMI.

So you've got $160,000 in accessible money, provided incomes and rent checked out you could potentially borrow approximately $700,000 (deposit plus Stamp Duty and conveyancing fees comes out of the $160,000). For the scenario that follows though we're going to work on an investment property valued at $400,000 solely because a $700,000 investment property sounds excessive. There's a couple of ways you can access the extra funds, one way is to cross collaterize (not a massive fan of this strategy personally). The other is to get an equity loan against your own home which is completely tax deductible provided you use the funds to purchase an investment. The reason I lean toward a separate equity loan is that it gives you a lot more room to move with lending. If you cross collaterize you generally have to have both houses and mortgages with the one bank. By having the equity loan you can have your own house with Bank A who does great rates with owner occupied property but you can have your investment with Bank B who do interest only loans really well. The below image shows the flow of funds. The equity loan and the investment loan are both tax deductible.

In summary, the equity loan acts as your deposit for the investment property. You borrow the deposit and Stamp duty using the equity loan and then the remaining 80% is borrowed solely using the investment property as security. These loans can both be interest only to really ramp up the tax effectiveness of your investment.