INVESTMENT HOME LOAN
Investment home loans are designed for people who intend to buy a property for the purposes of renting it out, or renovating and selling it for a profit. The process of applying for an investment loan is no different to an owner-occupied loan, however, the maximum LVR is reduced to 90% maximum in most cases which includes any Lenders Mortgage Insurance (LMI) payable.
Due to the perceived higher risks, lenders generally have tougher requirements so you’ll need to present a reasonably strong financial position and hold at least a 10% deposit or equity built up in another property to be eligible for an investment home loan.
Use the equity in another property to put towards your deposit
The most common process people ascertain the funds to put toward an investment property purchase is by using the equity available in their owner-occupied property.
When borrowing money to contribute to an investment property, you want to make sure that you separate the loans as you need to easily determine the funds that relate to your owner-occupied property and the funds that relate to the new investment purchase.
The reason behind this is it makes it easy for your accountant at tax time to determine what they can claim and what interest relates to your investment property.
Should I make principal and interest payments or interest-only payments?
There is no right or wrong answer to this question. It all depends on your strategy and the reason you are purchasing an investment property. People will look at interest-only repayments for investment purchases because they want to keep their monthly expenses to a minimum.
You Purchase a property for $400,000. You have a 20% plus costs deposit available of $100K. Based on today's interest-only repayments would reflect the following
- Principal and Interest at 3% - $1,349 per month
- Interest Only repayments at 3.5% - $933 per month
The interest-only rate is higher, but the monthly repayment is approx $400 per month lower than the principal and interest. This looks great on paper and most people would take the interest-only option, but if we made repayments of ten years of interest-only basis, we would still owe $320,000.
What's the point in that you ask?
Let's say the property has been rented out for the full 10 years. You have been collecting $350 per week in rent, which equates to $1,516 per month. We cover the interest-only repayments of $933 per month and there is approx $583 per month remaining.
In addition, the property that you purchased for $400,000 ten years ago, would easily sell in the current market for $650,000.
If we look at the end picture, you have purchased a property that has increased in value by $250,000 and you have received income of approx $84,000 also.
During this time, the renters have covered the repayments of the loan as well as providing you with an ongoing income which is theoretically a better position than before purchasing the property.
There are going to obviously be maintenance costs for the property, paying an agent to rent the property out and of course, the costs associated with the home loan.
Unfortunately, we don't live in a perfect world and when investing, there is always going to be an aspect of risk involved. As long as you buy a property, which will be favorable for renters and in a location that is going to be sort after, then your chances of success will be a lot more promising.
Should I consider buying an investment property?
- Regular rental income to the investors, which may be potentially higher than the loan repayment.
- Property value may increase, given you bigger returns when you sell.
- Tax deductions for expenses related to your investment property
- Access to equity for future property purchases
- High initial costs of buying an investment property
- It takes time to rent out a property, so you’re generating a rental income straight away. There may be other gaps in time when the property is left empty and not generating a rental income.
- Property value may decrease, your property may take a long time to be sold, or be sold at a lower price than expected.
Applying for an investment home loan
The process is similar to applying for a standard residential home loan. As part of your application, your lender will want to understand your employment status, credit history, and living expenses.
Speak to a mortgage broker who can advise you on the detailed steps to securing an investment home loan.
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