Investment Property Home Loans – What You Need to Know

Have you been considering expanding your property portfolio, but do not have the spare cash to do so? Have you considered using equity in your property to bridge the gap between your cash shortfall and the deposit required for an investment property?

What is an investment property?

An investment property is a home that is purchased with the intention of renting the property out, or to ‘Flip it’.

‘Flipping’ a home refers to the process in which investors will purchase a property in a rapidly growing are with the intention to sell it later for a profit or make renovations to increase its value.

What makes an investment loan different to a regular home loan?

There are loans that specifically cater to investing. While these loans operate in the same way as a regular home loan, it can come with additional fees or a higher interest rate.

While lending conventions are slightly stricter for investment loans, the expected rental income you anticipate earning is also considered.

What your investment strategy may be for the property can also determine the best way to structure your loan facilities, i.e., fixed rates, variable rates, interest only, principal and interest, etc.

What are the pros and cons to an investment property?

We have outlined a few key advantages and disadvantages when it comes to investing in the property market.

 

Advantages Disadvantages
  • Growth Potential – market growth and house value increase
  • Returns – rental income.
  • Tax Deductions – you may be able to claim property expenses against your taxable income.
  • Equity – potential to utilize equity in your investment to purchase other properties
 

  • Liquidity – The cash value behind your property is harder to access, and selling can often be lengthy (and costly)
  • Vacancy – There is the risk of your property being vacant, meaning no returns are being made for an extended period.
  • Cost – Upfront costs can be expensive i.e. investment stamp duties.

 

Things to Consider

Prior to applying for your investment loan, there are a few things you may want to check:

  1. Credit History

A good credit score is vital for lenders, as they want to see proof of repayments. They will take any arrears and overdraws into consideration when assessing your application.

  1. Employment

Lenders like to see a good employment history with steady incomes, and usually look for applicants with consistency in their employment role and industry. If there has been changes in employment in short period of time, the lenders will look t the gap between employment and your prior work positions.

  1. Loan to Value Ratio (LVR)

LVR refers to how much equity you have vs how much you need to borrow. The higher your deposit, the lower your LVR. Lenders value a low LVR, so save as much as you can!

  1. Borrowing Power

Your borrowing power starts with your income vs your expenses. Calculate how much disposable income you have this month to get an idea of your borrowing power.

  1. Fees & Ongoing Costs

As mentioned earlier, investment properties may attract a higher interest rate resulting in higher ongoing holding costs. Further to that, investment property expenses and potentially land tax can also be incurred, so make sure you are accounting for this in your budgeting.

  1. The Property

As the lender will be taking on the property as security, they will do full valuations on the property to assess the risk to the bank. Therefore, looking at properties that are not considered liveable or are in dire need of renovations, may also impact the lenders decision around accepting the property as security.

If you are considering investing in property, get us on your side. We can help you with assessing your borrowing power, applying for your loan and everything in between! Fill out the form below, and we will be in touch within 24 hours to talk with you further and start your journey in expanding your property portfolio!

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