Can I Buy A First Investment Property With Only a 5% Deposit
Short answer: technically, yes. It's a much narrower path than most people assume, and it's a different path entirely to the one owner-occupiers get to walk. Here's what actually happens when you try to buy an investment property with 5% down.
The government scheme will NOT help you
The first thing I clear up with clients is that the Australian Government 5% Deposit Scheme, the one that waives Lenders Mortgage Insurance for eligible buyers, is an owner-occupier scheme. Eligibility requirements: applicants must plan to live in the home, and the Scheme isn't available for investment properties. If you buy under the Scheme and later convert the property to a rental, you lose the guarantee and can be hit with the LMI bill you thought you'd avoid, once the value has increased enough beyond 80% LVR, then you won’t have to rely on the government scheme to cover the LMI component.
So if you're buying to rent out, that particular door is closed from the start. Everything below is what's left.
Fewer lenders will actually say yes
Plenty of lenders will approve a 5–10% deposit loan for an owner-occupier. Far fewer will do it for an investor.
If you’re paying too much for the property and the valuer doesn’t value the property at what the contract price is then you’ll have to come up with the remainder. The lenders that sit in this space typically and only doing short form valuations; no desktop or AVM valuations. High-LVR investor lending sits with a smaller panel of lenders, and even among those, it's common to require genuine savings, money you've actually saved yourself, not a recent gift or loan, once you're borrowing above 90% of the property's value, as outlined in The Broker Times' rundown of current LMI provider rules.
The property matters as much as the deposit
This is the part people miss. A 5% deposit doesn't mean you can borrow 95% against anything you like, it means you can borrow 95% against whatever your lender is still willing to lend that high against, and that list is shorter for investors and shorter again for certain property types (small units, higher density).
High-density apartments are the clearest example. Under Macquarie's own broker credit guidelines, high-density apartments are capped at 80% LVR regardless of your deposit, the restriction is set by postcode, not by how much you've saved. A 5% deposit buyer eyeing an inner-city unit in one of those postcodes doesn't get a "no, come back with more" conversation. They get told the loan they want doesn't exist for that property, full stop. From personal experience, the wrong property in the wrong postcode can drop your available LVR to 70%, effectively demanding a 30% deposit instead of 5%, or result in an outright rejection, sometimes losing your deposit if you can’t come up with the extra 25% deposit, same goes if you overpay according to what the valuer will value the property at.
The practical implication: if you're set on a 5% deposit, you also need to be flexible on what you buy. Houses in established, lower-density areas are far more likely to get approved at high LVR than apartments in inner-city, high-supply postcodes.
Personal story: I purchased an investment property in Latrobe Valley and I was purchasing with a 12% deposit (the sweet spot in my opinion for reducing LMI). After contract the valuer valued it at contract price but the bank after the fact deemed the property a Category 3 property and their risk appetite was lower so the wanted a 70% LVR. SO for this purchase I went from needing a $52k deposit to $130k… Luckily I was able to come up with the funds, but if you’re going with such a low deposit then you had better be talking with your broker before contracting on a property about the postcode you’re looking to buy in.
What it actually costs you
Even where a lender says yes, 95% LVR is the most expensive band to borrow in. LMI premiums don't scale in a straight line, they climb steeply as you cross 90%, then again as you cross 95%, and investor loans are typically priced above the equivalent owner-occupier loan at the same LVR. On a $500,000 investment property, a 5% deposit is $25,000, but you're insuring a $475,000 loan at the most expensive point on the LMI curve, often a premium running into five figures, added to your loan balance rather than paid up front, which means you're paying interest on your insurance for years.
Fewer lenders competing for that loan also tends to mean less room to negotiate on rate. You're not just paying more in LMI, you're often paying more for the loan itself.
Pro tip: When investing in property, I am big on outperforming the market so I would highly recommend doing you’re research and not just purchasing in the suburb you live in.
Conclusion, is it realistic?
For the right buyer, in the right postcode, buying the right asset in a growth market, with genuine savings and a clean loan application, yes, 5% deposit investment loans do get approved. But "realistic" and "possible" aren't the same question. Most people wanting to get into an investment property with such a low deposit they usually running on FOMO (fear of missing out).
FOMO, usually this means they have heard about an area that has made someone else a lot of money, for an investment this usually means the market had already grown and the household affordability are already capping out. Ask yourself how much growth can the area have before the household income affordability caps out, too much supply and/or demand drops off and can’t push prices up anymore. (Think Perth from ~ 2011 to 2022, a growth rate of 1.3% over that period)
Unless you've been in the property game and are confident you can pick the right market for growth, or you've already done the learning and are confident you can pick the right market. We don't want negative equity and be stuck at your first investment. Example: buying in 2011 in Perth at the top of the market and not being able to do anything until 2022.
Personal story: Perth 5 year growth has grown exponential. Some areas have more than doubled. My purchase in Camillo, WA doubled in less than 2 years. I sold it at a record price and now the prices aren’t growing as much right now. Things might change but buying in Perth might be risky because the values have grown plenty. There are markets elsewhere that may have better potential. Get the experts in your corner, don’t rely on your knowledge of what you think a good area is, it is unlikely to do well, unless you are well informed about a market.
PS: I bought my Camillo property with a 5% deposit under the 5% First Home Guarantee. It's just the way it worked out for me. Buying where you live will unlikely reap the rewards.
Anyway, for most investors, I'd treat 5% as the theoretical floor rather than the plan. A 12% deposit opens up a wider panel of lenders, moves you out of the most expensive LMI bracket, and doesn't restrict your property search nearly as much. If you lack the knowledge or the experts to purchase with a 5% deposit then saving more and learning everything to do with outperforming the market is my recommendation. Learn more and save more before taking action.
If you’re just starting out. Start here for learning about markets to invest and choosing the right people to help you, this my favourite at the moment, they will teach you the basics and beyond, but I really like the expert busting series to identify who to trust in this crazy world of unregulated financial freedom and property investing.
I wish you wealth.
Talk soon
Liam
This article contains general information only and doesn't take into account your personal financial situation, needs or objectives. It isn't personal financial or lending advice. Lender policies, LMI pricing, postcode restrictions and government scheme eligibility change regularly, confirm current criteria with your broker or the relevant lender before making any decisions.