How Investors Borrow 100% for a Rental Property
One of the most common questions property investors ask is how it is possible to borrow the full purchase price of a rental property. On the surface it sounds impossible, because lenders generally require a 30% deposit and will not offer a true 100% loan against a single property.
However, investors can achieve what is effectively 100% borrowing by using equity in another property to cover the deposit and costs. The key is understanding how equity works and how lenders view security.
What 100% Borrowing Really Means
When investors say they have borrowed 100% for a rental, they do not mean the lender has offered a single loan covering the entire purchase price secured only by the new property. Instead, the investor is using a combination of loans secured against different properties.
In simple terms, you are not avoiding the deposit. You are sourcing it from somewhere else.
Step 1: Using Equity as the Deposit
If you already own a home or another investment property, chances are it has grown in value. The difference between the property’s current value and the amount you still owe is called equity.
Lenders often allow you to release part of that equity by taking a separate loan against the existing property. That equity loan becomes your deposit for the new rental.
For example:
- Your home is worth $800,000
- You owe $400,000
- You may be able to access a portion of the $400,000 in available equity
If you release, say, $150,000 of that equity, you can use it for the deposit.
Step 2: Borrowing the Remaining Amount Against the New Property
The second loan is the standard investment loan secured by the rental property itself. This loan usually covers 70% of the purchase price.
When you combine the main loan with the equity loan, you end up covering the full amount needed to buy the property. In practice, you are borrowing 100%, even though the borrowing is spread across multiple properties.
Borrowing 100% is a powerful strategy, but it increases your level of debt. There are a few things to consider...
Why Investors Use This Strategy
1. It preserves cash flow
Using equity means you do not have to save a new cash deposit. This allows you to enter the market sooner and continue building your portfolio.
2. It leverages existing assets
If your current property has performed well, releasing equity lets you put that growth to work rather than letting it sit unused.
3. It keeps your savings available for buffers
Having cash on hand is vital for covering vacancies, maintenance and unexpected costs. An equity strategy keeps your liquidity intact.
What Lenders Look For
Even when borrowing the full amount, lenders still assess:
- Your income and ability to meet repayments
- The rental income expected from the property
- Your overall debt levels
- The value and stability of the property being used as security
The fact that equity is being used as the deposit is common practice and is usually well understood by lenders.
Risks to Be Aware Of
Borrowing 100% is a powerful strategy, but it increases your level of debt. A few things to consider:
Higher repayments - 100% lending mean a larger overall repayment commitment.
Market fluctuations - If property values fall, having borrowed the full amount may reduce the equity buffer you hold.
Cash flow pressure - One of the major issues with rentals is their cashflow, and if you buy a stock standard rental with 100% debt, the cashflow is likely to be quite negative. Vacancies or rising interest rates can further impact the cashflow and your ability to comfortably meet repayments. This is why maintaining a cash buffer is essential.
Summary
Borrowing 100% on a rental is not about avoiding a deposit. It is about using the equity you already have to create the deposit. By combining an equity loan with a standard investment loan, you can purchase a rental property without using additional cash.
It is a strategy used widely by investors who want to build a portfolio efficiently. As long as the risks are managed well and the numbers make sense, it can be a smart and sustainable approach to property investing.
Click here to book an obligation-free chat with one of our financial advisers.
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.
To Succeed in Property Investment, You Need to Buy Where You Can Add Value
As the property market becomes slightly more active, with small upward movements in median prices over the past few months, the key is to buy wisely and ensure the numbers work in your favour.
Smart Christmas Spending: Protect Your Budget and Your Borrowing Power
Christmas is a wonderful time of year. It brings family, celebrations and the joy of giving. It can also bring a lot of financial pressure. With gift lists, entertaining costs and last-minute purchases, it is easy to rely on credit to get through the season. The trouble is that consumer debt taken on in December can follow you well into the new year, especially if you are planning to purchase a property.