When to Use Equity vs Savings for Your Deposit

Most sole traders hold capital in two places: their offset account and their home equity.

The deposit decision matters because it sets your servicing position, your LMI cost, and how much working capital remains accessible after settlement. Get it wrong and you either overpay for insurance or tie up cash your business might need in three months.

How Much Deposit You Actually Need

You need enough cash or equity to cover the LVR threshold you're targeting, plus settlement costs. For an investment loan, lenders typically require at least 10 per cent genuine savings or equity, with the balance sourced from either additional savings, equity release, or a gift. If you're borrowing above 80 per cent LVR, you'll pay LMI, which is calculated on the loan amount and your LVR. The premium can range from a few thousand dollars to over $20,000 depending on the size of the loan and how far above 80 per cent you're borrowing.

Sole traders frequently underestimate settlement costs. In addition to the deposit itself, you'll need to cover stamp duty, legal fees, loan establishment fees, property inspection costs, and if applicable, LMI. Stamp duty alone varies by state and purchase price. In New South Wales, duty on an investor purchase is calculated on the full contract price with no concessions.

Consider a sole trader purchasing an investment property in Sydney's inner west. If they target a 90 per cent LVR to preserve business liquidity, they need 10 per cent deposit plus settlement costs. With LMI added, the upfront commitment might reach 12 to 14 per cent of the purchase price when all costs are included. That's the figure to plan around, not just the deposit percentage.

When Equity Release Makes More Sense Than Cash

Equity release keeps your operating cash intact. If your business relies on a healthy offset balance to cover irregular income, tax payments, or supplier terms, pulling $50,000 or $80,000 from savings can leave you exposed. Lenders will assess your borrowing capacity based on your income and existing commitments, including the increased debt from releasing equity. The question is whether the cost of a higher loan balance outweighs the value of liquidity.

In our experience, sole traders with variable income benefit more from holding accessible reserves than from minimising their loan size. Interest on the additional borrowing used for the deposit is tax deductible if the funds are used to acquire the investment property. The ongoing cost is offset by the deduction, and the cash buffer remains available.

Consider a scenario where a sole trader has $60,000 in savings and $150,000 in usable equity. They could deploy the full $60,000 as deposit, or use $20,000 cash for settlement costs and release $50,000 equity for the deposit itself. The second structure leaves $40,000 liquid, costs roughly an additional $200 per month in interest at current variable rates, and provides significantly more flexibility if income drops or an equipment purchase is needed.

Serviceability Impact of Debt-to-Income Limits

APRA's DTI lending limit, active from February this year, restricts the proportion of new loans each lender can write to borrowers with a total debt-to-income ratio of six times or more. The limit applies separately to owner-occupier and investor lending. For sole traders, this can create a hurdle if your assessable income is modest relative to your total proposed borrowing.

Lenders calculate DTI using your total debt commitments, including your home loan, the new investment loan, and any business or personal debts. If you release equity to fund the deposit, your total debt rises and so does your DTI ratio. If that pushes you over six times income, the lender may decline the application or ask you to contribute more cash to bring the ratio down.

This is where deposit structuring becomes tactical. Increasing your cash contribution lowers the loan amount, which lowers your DTI ratio. If you're close to the threshold, a $10,000 or $20,000 shift from equity to cash might make the difference between approval and referral.

Tax Treatment of Interest on Borrowed Deposits

Interest on funds borrowed to acquire an income-producing asset, including an investment property, is deductible under the Income Tax Assessment Act 1997. If you release equity from your home to fund the deposit on a rental property, the interest on that additional borrowing is deductible against your rental income, provided the funds are used for the investment purpose and not redirected to private use.

This changes the real cost of the equity release. At current variable rates and a marginal tax rate of 37 per cent including Medicare Levy, the after-tax cost of borrowing an additional $50,000 for the deposit might be around $130 per month rather than $200 gross. That narrows the gap between using equity and using cash considerably.

One detail frequently overlooked: if you draw on equity before contract exchange and the funds sit in your offset account or another account not directly linked to the investment purchase, the deduction may be challenged by the ATO. Link the drawdown to the investment acquisition clearly. Your broker and accountant should coordinate on the structure.

LMI Calculation and Capitalisation Options

LMI is charged when your LVR exceeds 80 per cent, and the premium is calculated on a sliding scale. A loan at 85 per cent LVR will attract a lower premium than one at 90 per cent LVR, even if the loan amounts are identical. For investment property, LMI premiums are typically higher than for owner-occupied lending due to the higher risk weight applied by lenders under APS 112.

You can pay the LMI premium upfront at settlement, or you can capitalise it into the loan amount. Capitalising increases your loan balance and your ongoing repayments, but it preserves your cash and equity at settlement. If liquidity is the priority, capitalisation is usually the right choice. The additional interest cost over the life of the loan is modest compared to the benefit of holding reserves.

For a sole trader structuring around cash flow rather than total interest cost, capitalising LMI and using equity for the deposit rather than draining the offset is often the most sustainable approach.

Grandfathering and New Build Exemptions Under the Tax Reform

From the 2027-28 income year, losses on established residential investment properties acquired after 12 May 2026 can only be offset against other residential property income, not against salary, wages, or business income. Properties held or under contract before that date, and eligible new builds acquired after that date, remain fully negatively geared against all income.

This affects deposit strategy if you're weighing whether to buy now or delay. A sole trader acquiring an established property before 30 June 2027 can still claim full negative gearing until settlement, and if settled before that date, the property is grandfathered permanently. If you're buying after 12 May 2026 but before 30 June 2027, you can negatively gear until 30 June 2027 only unless the property is classified as an eligible new build.

For sole traders with lumpy income and significant rental losses in the early years, the ability to offset those losses against business income can be material. If you're planning to acquire an established property and want full negative gearing, the decision to proceed and how much deposit to commit should be made with the legislative timeline in mind.

When to Consider Refinancing Your Home First

If your home loan sits on a rate higher than current market, or if your usable equity is limited by an older valuation or a restrictive product, refinancing your home before applying for the investment loan can improve your position. Refinancing can release additional equity, lower your ongoing repayments, and improve your serviceability for the investment purchase.

Refinancing takes time. Applications lodged now typically settle in four to eight weeks depending on lender and valuation. If you're targeting a specific property or auction, the refinance needs to be completed well in advance. Alternatively, some lenders will assess both the home refinance and the investment purchase together as a simultaneous application, provided the numbers work and both securities are acceptable.

We regularly see sole traders who have built significant equity in their home but haven't reviewed their loan structure in years. Releasing that equity at a lower rate, with contemporary offset features and better serviceability treatment of business income, often makes the investment purchase viable where it otherwise would not be.

Call one of our team or book an appointment at a time that works for you. We'll review your current position, model the deposit options, and structure the application to keep your business liquidity intact while meeting lender requirements.

Frequently Asked Questions