How does an investment loan work?
A loan for an investment property is similar to other home loans, however some features and approval processes differ.
You usually need a lower loan-to-value-ratio (LVR), which means you need a bigger deposit than for other home loans or equity in an existing property.
The process of applying for a loan for investment home is similar, and our team know which lenders have favorable criteria for investors and can guide you through the process.
QUALIFYING FOR AN INVESTMENT LOAN
As an investment property is considered a higher risk for the lenders, the approval criteria is often more strict than for an owner-occupier loan.
To qualify for an investment property loan need to be in a strong financial position and be able to prove a history of savings, sound financial management and a firm understanding of your monthly budget.
Lenders will generally look for:
- At least 10% in savings as a deposit for the property
- A good credit history and above-average credit score
- Stable employment, good mthly budget
- If you’re borrowing more than 90% of the property value, they may look for equity in other properties
Some lenders are more likely to support investors than others, and from our experience we can guide you to the most suitable lender for your circumstances.
PROS AND CONS OF OWNING AN INVESTMENT PROPERTY
- An investment property can be an ongoing source of rental income, offering more predictable returns than other types of investment
- Investment properties can appreciate (grow in value) over the long term (but can experience fluctuations)
- Investment properties offer possible tax advantages – some costs associated with buying and maintaining an investment property can be used as tax deductions, including the interest payments on the loan; insurances; agent fees; maintenance/repair costs; council rates; depreciation (decline in value) of some assets associated with the house; some constructions costs; advertising costs of attracting tenants.
- Property can be seen as less volatile than other investments.
- No specialist knowledge is required for property investment.
- It is a physical asset, that you can touch and feel, which can appeal to some investors.
- Interest rate rises and fluctuations can cause some uncertainty
- There is a risk of decline in value (capital loss)
- There is no income if the property is vacant for a period of time
- Difficult tenants can cause financial loss via damage to the property, or legal costs to recover payments
- Repair and maintenance costs can be significant (especially as properties age)
- You pay tax when you sell the property (Capital Gains Tax)
- Property is a less flexible investment – you can’t sell of a part of the investment if you need to liquidate funds.
- If you don’t have enough deposit or equity, banks can force you to pay Principal & Interest repayment, which will put pressure on your mthly budget
THINGS TO CONSIDER BEFORE YOU INVEST
- Look for properties in areas with high growth, high rental yields and low vacancy rates.
- Become aware of proposed planning changes that may affect the property value.
- Consider the appeal of local schools, facilities and access to public transport.
Type of Property
- When looking for a property, look for features that appeal to the type of tenants you’re trying to attract. These might include a second bathroom; large yard; separate living areas.
- Be aware that older properties will likely require more repairs and maintenance, which will increase costs and lower income from the property.
Costs of owning an investment property
When developing your budget, don’t forget to consider the costs associated with owning an investment property, including:
- Council rates and water
- Building insurance
- Landlord insurance
- Body corporate fees (for units or townhouses)
- Land tax
- Property management fees (if using an agent to manage the rental)
- Repairs and maintenance
- No rent from tenants if untenanted for short period of time