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How to get a home loan for your first investment property

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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.

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Saving the deposit

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 may be able to borrow over 80% Loan to Value Ratio (LVR), that is with a deposit of under 20% but your options will be limited and you are likely to be charged Lenders Mortgage Insurance (LMI).

You can use Lendi’s LMI calculator to find out how much you might have to pay:

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Using a guarantor

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.

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Using the equity in your own home

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:

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Show your ability to make repayments

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:

  • Income
  • Bank statements and spending
  • Employment history (could indicate stability)
  • Credit history
  • Any assets you own or liabilities you owe

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Consider getting pre-approval

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.

Benefits to pre-approval:

  • Narrows down the number of properties you can look at
  • Avoid disappointment by only looking at properties you can afford
  • If you’re buying at an auction, you need to make sure you’ll have the funds as you are committed to the purchase
  • Speeds up the closing period
  • A seller or agent might feel more confident and take the property off the market knowing that the pre-approved buyer is likely to be able to close on the deal. Pre-approval indicates a serious buyer.

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.

Principal & interest (P&I) or interest only?

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.

Benefits of interest only repayments:

  • Lower monthly repayments
  • The interest payable on investment home loans is tax deductible (owner must not be living on property)
  • May be good if you anticipate selling the property before the end of the interest only period. This relies on the assumption that the property will increase in value and build equity that will give a decent return on investment (ROI)
  • Can use the money you would otherwise be paying on principal for other investments

Disadvantages to interest-only repayments:

  • It delays the inevitable as you will likely end up paying more in interest charges over time as you are not reducing the loan amount (principal) during the interest only period
  • Sudden transition to P&I repayments once the interest only period is over
  • Higher interest rates
  • Not all lenders will offer interest only repayments
  • Property’s value may decrease meaning that quick sellers won’t get a ROI

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Differences between investment home loans and owner-occupier home loans

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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.

Tax benefits

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.

Rental side-income

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.

Ineligible for government incentives

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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Tags: investment property, investment, investment return, interest, interest rate, borrowing power, lmi (lenders mortgage insurance), gross rental yield, rent purchase, negative gearing

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Check today's low rates

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Important legal stuff

COMPARISON RATE WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years.
Lendi is the trading name of Lendi Pty Ltd, a related body corporate of your licensed credit assistance provider, Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence Number 442372). We will never sell your email address to any third party or send you nasty spam, promise.
EXAMPLE: This example is current as at 20th October 2016. A Click Loans Online Principal and Interest Loan of $150,000 over 25 years has monthly repayments of $767. This is calculated based on the interest rate of 3.69%, comparison rate of 3.69%, upfront fees of $0 and annual fees of $0.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
Lendi is a privately owned and operated Aussie business. Our mission is to provide Aussies with the right experience when choosing a home loan from our panel of major and non-bank lenders including Click Loans which is a wholly owned subsidiary of Auscred Pty Ltd and a related body corporate of Auscred Services, your credit assistance provider. Although Lendi compares over 1600 products from over 30 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 40% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors. We have an independent and founder led board.
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