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The process of getting a home loan for your first investment property is similar to getting a home loan for an owner-occupied property. However, there are a few differences and things you should be aware of before beginning your investment property journey.
As with traditional home loans, one of the first steps of buying an investment property is getting approved for an investment loan is to come up with a deposit. Having a deposit of at least 20% of the property’s value is ideal as it makes you eligible for most investment home loans. It also might help identify you as a lower risk borrower and get your home loan approved faster.
You can use Lendi’s LMI calculator to find out how much you might have to pay:
See how much you might need to pay if you're low on a deposit.
One option to consider if you have no deposit, or a very low one, is to use a guarantor. A guarantor will usually be a close family member who uses a portion of their own equity to secure a home loan for the prospective property buyer.
This can be a good option for someone wanting to speed up the process of owning a property, but it does come with risk. If the borrower is unable to make repayments, then the guarantor may be required to repay the portion of the loan they secured.
Calculate your borrowing power based on your income.
Another way to avoid needing to save up a hefty deposit is to use your own equity. If you already own a home and have developed substantial equity in it, you may be able to use part or all of that equity as a deposit for a new property.
It’s important to note that using equity from another property increases the principal you’ll have to repay on that one. Make sure you’re ok to make extra loan repayments or increase your repayment amount before doing this.
Use our equity calculator to find out how much equity you might have in your home:
A key part of the approval process is the lender ensuring that you’ll be able to comfortably make repayments. Most lenders will look at the following when assessing your application:
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Getting a pre-approved for a home loan means that you’ll know how much money you can borrow so that you can more accurately narrow your property search. Once you find a suitable investment property, you won’t have to hurry to get your finances and loan in order as you’ll already have it sorted.
While pre-approval can give you peace of mind, it’s important to note that it’s not guaranteed final approval and acts more as an indicator of someone’s borrowing power.
It’s a smart idea to consider your investment goals when deciding how you want to repay your loan. While many owner-occupier buyers will opt to repay both the principal and interest, it’s not uncommon for property investors to start by making interest only repayments.
Making P&I repayments means that you will lower the loan amount and potentially pay less interest over the duration of the loan. P&I repayments also often have lower interest rates.
Interest only repayments mean that you only pay off the interest charged on your loan over a set period of time (usually up to 5 years). These repayments will generally be smaller at first, but will increase once you need to start paying the principal too.
While there are many similarities when it comes to the process of applying for the loans, there are some differences between investment home loans and owner-occupier home loans.
An important difference is that investors will pay higher interest rates than owner-occupiers. On paper, the difference may seem insignificant but will add up over time. However, investors do get certain tax benefits that owner-occupiers are not eligible for.
Investment property owners are often able to write off the interest charged on their loan as tax deductible, so long as they aren’t living in the property. If their occupancy status changes and they decide to reside on the property, they must notify their lender and refinance to an owner-occupier home loan (and often lower their interest rate as a result).
Because of this tax benefit, investors might choose to make interest only repayments on their investment property to maximise tax savings. This can be a good strategy if you buy a property and intend to sell it before the end of the interest only period.
If the property appreciates in value, the equity you own will increase without ever making principal repayments and you’ll still make a a return on your investment. Look to invest in high-growth areas that are experiencing gentrification and/or developing infrastructure. Keep in mind, you'll still need to pay capital gains tax on the profits of your sale.
An obvious difference between the two home loan types is that investors are earning a rental income. If your rental income is lower than the expenses incurred from the investment property, your property is negatively geared and can reduce your taxable income.
If your rental income is greater than your expenses, the investment property becomes positively geared and you will be taxed on the rental income.
Investors may not be able to access and benefit from first home buyer schemes as they are generally targeted at owner occupiers. Investors also need to consider the prospect of becoming a landlord and whether it would be better to pay for property management.
Summary of differences:
|Investment home loans||Owner-occupier home loans|
|Higher interest rates than owner-occupier home loans||Lower interest rates|
|Interest charged on the loan is tax deductible||Generally more home loan options to choose from|
|Could lead to a positive cash-flow where rental income is greater than expenses (positive gearing)||May be able to utilise first home buyer benefit schemes (e.g. First Home Owner Grant, First Home Super Saver (FHSS) scheme, concessions on stamp/transfer duty)|
|If expenses exceed the rental income, they can be tax deductible (negative gearing)||May be easier to be approved for|
|Become a landlord or pay for property management||Usually can only make P&I repayments|
|More likely to be able to make interest only repayments||Higher LVR loans are easier to access|
|Increasingly difficult to get approved for and may need larger deposit|
Staying on top of the things listed above can help you get a home loan as a first time investor and increase your chances of getting approved at a low rate. Chat to a Home Loan Specialist to find out more.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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