Why invest in property?
One of the hardest parts about borrowing to invest can be deciding exactly what it is you want to invest in. These days there are plenty of options, from exchange-traded funds, stocks, managed funds, and everything in between.
While we always recommend that every investor seek independent advice from a qualified financial adviser, purchasing an investment property can be a very profitable move for the right investor.
Investment properties have become a popular investment strategy for many Australians of late and can come with plenty of benefits. These include things like potential tax benefits, passive income, and potential capital growth.
The right property investment can also make for a relatively stable way to put your money to work. Investment home loans can also be less risky than other forms of investment lending such as a margin loan which can get ugly very quickly if your investments fall.
Can I use the equity in my home as a deposit?
You sure can. If you’ve already paid off enough of your existing home loan to build a reasonable amount of equity, you may be able to leverage up to 80% of it to cover the deposit on an investment loan.
Depending on your financial situation, this may be far easier than saving up to cover the deposit on an investment home loan out of pocket. A larger deposit can also lead to lower interest rates and potentially save you from having to invest in Lender’s Mortgage Insurance, both of which will help lower your long-term loan balance.
How do you qualify for an investment property loan?
Borrowing to invest, whether in exchange-traded funds or property, is unfortunately never without its risks. While an investment loan can be a solid way to raise capital for a savvy investor, lenders tend to be fairly picky about giving out even a minimum loan until they’re sure you can afford the repayments.
In the end, this is for the benefit of both investors and lenders alike, as there’s nothing worse than struggling to come up with borrowed funds. Whether or not you qualify for an investment loan offer will depend on things like:
The size of your deposit
While the point of any loan is to borrow money, it’s highly unlikely you’ll find a lender willing to cover 100% of your investment property price. Most will expect you to cover a minimum of 10%. The higher the deposit you can make, the better, as it will likely affect the interest rate of your investment loan.
Employment and Expenses
Unfortunately, unemployment may not be the best time to seek loan approval for your next investment property. Lenders will want to ensure that you can afford to make not only repayments now, but throughout the life of the loan. They’ll likely take your employment into account as well as your existing loans and other expenses to see if you meet their eligibility criteria.
It will probably come as no surprise that a credit check will come into play when determining your borrowing amount. Before taking on an investment loan, you’ll want to be very solid financially. This means that you’ll ideally have an above-average credit score and a long, consistent history of making payments on time. Many investment loan customers tend to be financially secure individuals with a high taxable income.
Are all property types acceptable?
When it comes to investment loans, not just any property will do. Most banks that engage in investment lending tend to require that a property measure up to certain criteria.
The property should:
- – Comprise a standard house, unit, townhouse, or land with construction
- – Have a 50m² or great living area
- – Be not only inhabitable but in good condition
- – Be located in a town of at least 10,000 people (bonus if its in a bigger city)
While this may seem a bit picky, these standards were developed because when a bank gives you an investment loan, they genuinely want you to succeed.
Make no mistake; this isn’t due to the kindness of their hearts. But your success for you means that you’ll be able to make your home loan repayments on time for the life of the loan.
The specific property you choose and how much money you expect to make from it can actually play a large role in the loan amount and comparison rate you’re able to get.
Things can get tricky when something called “negative gearing” comes into play.
In simple terms, negative gearing borrows investment money to make a purchase that will earn you less of a return than it costs you. For instance, if you were to take out an investment loan to buy a property that would not generate enough rental income to cover your loan repayments and other ongoing fees associated with property ownership.
That said, you may be able to offset the negative gearing against other income to provide tax savings. This is a situation in which we’d highly encourage that you seek the independent advice of your broker or financial advisor.
What is the maximum interest-only term?
An interest-only investment home loan is pretty much exactly what it sounds like. This type of loan will allow you to make interest-only repayments on your total borrowing amount for a fixed term. While the length of the term can vary based on the lender, some banks offer interest-only payments for up to 10 years.
When the term ends, you’ll then be expected to begin paying both principal and interest instead of just interest repayments throughout the rest of the life of the loan. Interest-only loans tend to be a bit more common among investors than those seeking an owner-occupier home loan.
Nonetheless, it’s important to understand the risks involved before taking on such a loan, as well as the fact that it may lessen your borrowing power.
These types of loans tend to be for investors who are attempting to free up cash by sticking only to interest repayments while they pay off an owner-occupier home loan that isn’t tax-deductible or those who plan to make maximize cash flow for other investments.