Are you considering getting a loan for an investment property? A lot of Australians are using property as a means of building wealth and taking control of their financial future. But before you go down this route, it’s important to understand how property investment works and if it aligns with your financial goals.
What is an investment property loan?
Investment property mortgage brokers say “An investment property loan allows you to borrow money from a lender to invest in a house, apartment, commercial property or land. Investment home loans follow a similar process to an owner-occupied property, but they have a few differences.”
For one, the rates for investment property loans are usually higher than for second home loans because lenders consider them riskier. But thanks to Australia’s tax benefits, you can earn rental income and take advantage of things like tax-deductible interest.
According to ABS’ 2019-2020 Survey of Income and Housing, 67.5% of Australians owned one investment property (besides their current home).
Suffice to say that the investment property market never sleeps, and the right time to buy is when you decide you’re ready.
So let’s take a look at your investment property financing options and loan eligibility.
How much can I borrow for an investment property?
Depending on your circumstances and the type of loan, you can borrow 100% or 105% of the purchase price. A 105% loan also has included the additional fees and costs of the application, so you don’t need any savings. You can usually borrow over 100% if you have equity in another property.
If you don’t have equity, you can borrow up to 90% of the purchase price.
Use the investment property mortgage affordability calculator to get an idea of your borrowing capacity.
Investment property loan requirements
First of all, to figure out if you qualify for an investment property loan, there are a few basic criteria that lenders usually assess – and that you should be aware of. So how do you get a loan for an investment property?
The 4 main investment property loan requirements are:
- Good credit history and credit score. However, if you have a bad credit history, a mortgage broker working with non-bank lenders or non-conforming lenders might be able to help.
- A deposit between 5%-20%. If you don’t have any down payment, you could still be eligible to borrow 100% or 105% for an investment property (we’ll cover this further down).
- Equity as security. If you want to borrow more than 90%, some lenders prefer you use equity as security (usually home equity).
- Income. You need to have enough current income to cover your living expenses – current liability and the shortfall on income from the new investment property. If you are a self-employed borrower, no doc investment property loans can be available for you.
Meeting all of these 4 criteria will help you qualify for an investment property loan. But as we’ve already mentioned, an experienced mortgage broker can help you get a loan by finding solutions to your unique circumstances.
How much deposit do I need for an investment property loan?
Investing in property can be an effective wealth accumulation strategy if done right. And one of the biggest decisions is your deposit and the repayments for your investment. Use an investment property loan repayment calculator to make sure your future plans align with the repayments.
So, do you need a 20% deposit for the investment property?
The short answer is: no anymore. It depends on the type of investment and the borrower but, in Australia, lenders can require zero-down payments up to a 50% deposit if your circumstances are more complex.
How to apply for an investment property loan
Traditionally, to apply for a loan, you had to go to a bank. And it’s best to go to multiple banks to compare their offers and get the best deal possible. But nowadays, there are multiple lender solutions available. If you are self-employed or have credit issues, you might not be able to borrow from a bank. That’s where mortgage brokers come in handy.
Our mortgage brokers work with over 30 lenders, from major banks to ethical lenders, non-bank lenders and non-conforming lenders. Contact us today if you need help getting a loan for an investment property.
What type of loan is best for an investment property?
It depends on how much deposit you have saved (if any), if you intend to sell the property within a short period of time, and other factors. Some of your best choices are:
- Interest-only loans
- Principal and interest loans
- Home equity
How to buy an investment property
When it comes to buying an investment property, Australians have more options than ever. Nowadays you don’t need to save a huge deposit in order to enter the property market. We’ve covered the top ways for you to buy an investment property, whether it’s in the city or country.
Lenders mortgage insurance (LMI)
Traditionally, a 20% deposit was the norm, but nowadays lenders are protected and investors can borrow more for an investment property through lenders mortgage insurance (LMI).
What is LMI and how does LMI work? LMI is a fee most borrowers pay when they borrow more than 80% and it protects the lender in case of losses.
Can I get LMI waived on an investment property? If you are a lawyer, doctor or medical professional looking for an investment home loan, you can be eligible for an LMI waiver. Because they are low-risk borrowers, those working in the medical profession are preferred clients for Australian lenders. That means that there are a lot of great deals available for them, including a potential no deposit needed to buy an investment property.
Using your home equity
You can use your own home as the deposit on the investment property. That’s another way you can invest without having to save a huge cash deposit to be able to buy.
A home equity loan means taking out a second mortgage on your current home. The loan amount is the difference between the home’s market value and the mortgage due.
Borrowing against an investment property is a popular way for Australians to purchase investment properties. And with the average Victorian homeowners holding equity levels of 49.3%, it’s something that future investors can take advantage of.
How to choose the right investment property loan?
So you’ve been approved for an investment loan. Now it’s the time to figure out what is the best one for you.
First up, you should start by assessing what you would like to achieve with an investment property.
Are you chasing rental income and planning to pay the property off? It then can become an income source in retirement when paid off. It then doesn’t matter what the capital gains (the profits you make after selling the property) are. You should also take into consideration that some areas or property types will be unlikely to get much value growth, but will have higher rental returns.
Then, there are properties that will have a lower rental return but are likely to have more capital growth (for example, older properties on a large block of land). And they may offer other opportunities – through renovations or development. In that case, interest-only repayments might be the best option for you.
Remember: it’s important to work out the end goal before looking up properties.
Principal and interest versus interest only
Making this consideration is essential when it comes to your investment property’s repayments.
Principal and interest (P&I) repayments are the most common. Principal refers to the principal balance (the amount owed on the home) and interest (on the borrowed amount).
However, in Australia, interest-only home loans can be a good idea because you can maximise your tax benefits and cash flow while you continue to benefit from capital growth.
If your investment property is for rent, the interest on your loan is fully tax-deductible. Just keep in mind that this is a short-term option (usually about 5 years). Afterwards, the principal will need to be repaid and that might not be affordable. This is why, depending on your future goals, it might not be the right strategy for you.
We help with the complex world of investment property loans
Buying an investment property is a fantastic way to build wealth, especially when you have the right people to help you do it. The lending industry is a complex and dynamic marketplace, which is why an experienced mortgage broker is the best way to secure the investment loan you need.
With a combined 35 years of experience in the whole financial industry, Loanscope’s home loan brokers can help you with personalised advice – whether it is for commercial property loans, an investment home loan for doctors or self-employed professionals.
Book your free, during or after-hours consultation today and enjoy unbiased, tailored advice from your Melbourne mortgage brokers.
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