When you invest in property, the investment loan you choose can help you achieve your long-term financial goals. Find out what to look for and what you can do to increase your chances of qualifying for the loan you want.
What Is an Investment Loan?
Investment loans are a type of loan specifically used to buy an investment property. The property can be residential or commercial. You may want to purchase a property so you can create an income stream by renting it out to tenants, or you may intend to benefit from capital gains by selling the property for more than it cost you. Either way, you aren’t buying a home to live in but rather to make money off of.
Investment loans can also be used for other types of non-property investments such as shares, managed funds, or a business investment.
How Are Investment Home Loans Different Than Owner Occupier Home Loans?
There are a lot of differences between home loans for property investments and those for a home to live in. Banks, Australian financial regulatory bodies, and the Australian Taxation Office all treat investment loans differently, viewing them as a higher risk, and more recently with the boom in interest in property investment in Australia, a threat to property market stability.
The Australian Regulation Authority (APRA) capped new investor lending to 10% of a bank's new loans. This has led to a lot of the distinctions between investor home loans and owner-occupier loans.
- Lenders set investor home loan rates higher than owner-occupier rates.
- The criteria for investment loans is stricter than it was in the past, making it harder to get a mortgage for an investment property unless you are a highly qualified borrower.
- There are usually fewer incentives available to property investors.
- Investor home loans are often available as interest-only loans, where some owner-occupier loans are not.
- nterest on investment loans is viewed by the ATO as a tax-deductible business expense but you can’t deduct interest from your home’s mortgage.
Can I Qualify for an Investment Loan?
Lenders will expect you to be able to meet strict lending criteria before they’ll approve your application for an investment loan, even for a modest-sized mortgage. A lot of banks view investment loans as riskier than owner-occupier loans. They know, if you have two (or more) loans to manage, if you run into financial stress, your home loan for the property you live in will take priority over any property investments. Also, unless you already have a lot of equity built up from other investment properties, juggling multiple large loans is in itself risky.
Before applying, it’s helpful to talk to a financial advisor to help you decide if property investment is right for you. You’ll also want to be able to meet the following borrower criteria:
- A clean credit history with an above average credit score
- Stable employment
- At least 5% to 10% of the purchase price in genuine savings – meaning you’ve been depositing money into your savings account over time rather than receiving a lump sum as a gift or inheritance
- Ideally, you have some equity built up in other property
To learn more about your options for investment loans, you can fill out our online enquiry form or call us on (07) 3146 5732 to talk directly with one of our investment loan specialists.
Should I Apply with a Non-Bank Lender for an Investment Loan?
You can qualify for an investment loan both with bank and non-bank lenders. Depending on your qualifications as a borrower, you may be able to borrow up to 95% of the property value even when you apply with one of Australia’s traditional banks.
However, what you should do is look for a lender that is more interested in offering investment loans. Some banks take a conservative approach to property investors as standard – they won’t offer high Loan to Value Ratio (LVR) loans to investors and they’ll have strict lending criteria.
We can talk to you about which banks do encourage investment loans. Contact us today – we can discuss which lenders may be a great fit for you based on your borrowing capacity.
How Do Lenders Assess Investment Loans?
Just like with your home’s mortgage, banks will look at factors like your income level and stability, your liabilities, and credit. They will also assess other factors unique to investment lending.
- Extra income: With investment loans, banks will take a different approach to the way they assess any income sources you have in addition to your base salary, such as dividends, bonuses, and self-employed income.
- Debts on other investment loans: If you already have an investment loan and are paying interest-only, keep in mind, lenders will factor in what your principal and interest repayments wouldbe when they look at your liabilities.
- Income from a rental property: If you already have an investment property and are earning an income from your tenants, your rental income will help you to qualify for another loan. However, not all lenders will factor in 100% of your rental income – many banks only use 80%.
- Negative gearing: If you and your financial advisor decide to use negative gearing, make sure you apply with a lender who will include your negative gearing benefits when they assess your borrowing capacity.
- Assessment on variable interest rates: Banks know you could run into trouble if interest rates increase and you are paying off multiple large loans, such as your home’s mortgage and an investment property. So, most will add a percentage or more to the interest rate you are paying to make sure you will be able to afford the loan when interest rates rise.
Ways You Can Increase Your Chances of Qualifying for an Investment Loan
Qualifying for an investment loan can be more challenging than getting an owner-occupier loan. If this is your first property, it can be even more difficult as you may have little to no equity to reduce some of the risk a bank would have to take on by lending to you.
There are a few things you can do to help increase your chances of getting the loan you want:
- Check your credit file to make sure there are no issues that could make it hard to qualify.
- Call your credit card providers and ask them to lower your limits – when you have high limits, banks look at this as how much credit card debt you could end up with.
- If you can, apply for your investment loan with your spouse. This way, your lender will income all of your household’s income.
- Consider fixing your interest rate for more than three years – many lenders won’t load the interest rate when assessing your borrowing capacity when you have a long-term fixed rate.
- Make sure your portfolio will be positively geared unless you know your lender will include negative gearing benefits.
- Invest in a property that the bank knows it can easily resell if you default on your loan – a standard house, townhouse, or unit in good condition in a high demand area. Many lenders are also comfortable with land and construction loans as long as you choose a good location.
One of the most important steps you can take is to apply for a lender that likes investment loans. We can talk to you about the lenders who do have favourable lending criteria for property investors. Fill out our online enquiry form or call us on (07) 3146 5732 to talk to one of our investment loan experts today.
What Should I Look for in an Investment Property Loan?
As with owner-occupier loans, there are different types of loans you can use. Each one will have advantages and disadvantages so make sure you know what you are looking for in a loan.
- Fixed rate loans offer predictability, making it easier to plan ahead because you know how much your loan repayments will be.
- If you plan on doing renovations to your property or investing further, you may want to consider a line of credit loan. This will give you the ability to access more money as you pay down your loan. You only pay interest on the money you use.
- Basic variable loans tend to come with the most competitive interest rates, although they may not have all the features you want. Also, make sure you are comfortable making your repayments if interest rates rise.
- With professional packages, you will pay more in fees but you’ll also be able to take advantage of the most features that can help you save on interest or pay down your loan faster.
You may also want to make sure your loan has some or all of the following features:
- 100% offset account
- Free redraw
- Free extra repayments
- Interest-only payments
The type of loan you choose depends on what you are looking for and how you plan to use your investment property to help build your portfolio.
What if I Have Bad Credit?
The problem with getting an investment loan with bad credit is you won’t qualify for a competitive interest rate. With a bad credit loan, your lender would charge a much higher rate to account for the risk, which would make the loan itself more expensive. This will cut into your potential returns.
Some people assume, once you have an investment property you are financially set. This isn’t necessarily true. With property investment, you need to create a plan for a variety of variables that can make it difficult to actually earn a return on your investment:
- What if you can’t find tenants right away – do you have enough money to pay the loan back without rental income?
- Have you considered expenses like insurance, property management, and the money you’ll need to cover any repairs or maintenance for your tenants?
- What will you do if the rental market shifts and you have to lower your rent in order to attract tenants?
- What if you decide to sell the property but you don’t make a profit or it sits on the market for months?
Without a competitive interest rate, property investment is a much less attractive investment option for a lot of borrowers. You will also have more trouble qualifying in the first place because investment loans often come with stricter lending guidelines.
How Long Can I Pay Interest-Only on an Investment Loan?
A lot of investors use interest-only loans to make it easier to enter the market. Only having to make interest payments for the first few years of the loan can make it easier to meet your financial obligations while you find tenants or prepare your investment to sell. Plus, you get to claim the money you pay in interest as a tax deduction.
But, you also want to plan ahead. You won’t be able to make interest-only payments forever! Most lenders have interest-only periods for 5 years or less. A handful will offer 10-year or 15-year interest only loans (15 years is the maximum interest-only term permitted in Australia).
How Much of the Property Value Can I Borrow?
If you meet certain criteria, you’ll be able to borrow a 95% LVR or 90% LVR investment loan with Lender’s Mortgage Insurance (LMI). As investment loans are considered a higher risk, you won’t be able to qualify for this much without a clean credit history, genuine savings, and a stable income. Many lenders will also want to see that you have at least 20% equity built up in another property.
With a 90% LVR loan, it’s a little easier to qualify. You’ll also be more likely to get an interest-only loan. LMI is also cheaper when you borrow less of the property value.
If you aren’t a polished borrower with a high, stable income, excellent credit, and minimal liabilities, you’ll increase your chances of qualifying if you have a larger deposit. The more equity you can purchase right away with a deposit, the less risk the bank will have to take on.
Another strategy is to use another property as security for your loan. If you already own a property, you can use it to secure your loan for your next property. In this case, you may be able to borrow 100% of the purchase price.
Investment Loans FAQs
How does depreciation work for an investment property?
As a property investor, you can claim depreciation for the decline in value of the building as well as its contents, such as furniture you own. Generally, you can claim depreciation for 5 to 10 years for furniture you purchase. For the building, the rate is 2.5%, which is based on how much the house cost to build.
What is negative gearing?
When you purchase an investment property but your costs for the property – insurance, council rates, management fees, and the loan itself – are more than the income you earn from your tenants, you are technically losing money each month.
This loss can then be claimed as a tax deduction, helping to reduce the amount of tax you owe while helping you pay off the loan and eventually fully owning a property that you can sell. This is called negative gearing. This strategy can make sense for high income earners but make sure you talk to an independent financial advisor to help decide if negative gearing is right for you.
Can you turn your own home into an investment property?
If you decide to rent out part of your home or to turn your home into an investment property and to live elsewhere, there are tax implications you need to be aware of. You’ll need to claim any rental income as taxable income but you may also be able to claim your mortgage’s interest as a tax deduction. You may also have to pay capital gains tax when you sell your property.
Be sure to speak with your accountant so you understand how your tax responsibilities will change when you rent all or part of your home.
What are the costs of property investment?
When you first buy a property, you’ll have to pay stamp duty, legal fees and conveyancing costs, and valuation fees. Once you own it, expect to pay council rates, utility expenses, maintenance costs, insurance, management fees, and levies if you invest in an apartment and have to pay fees to the body corporate.
What is rentvesting?
Rentvesting is a strategy first time homebuyers use. Instead of purchasing a home to live in as your first property, you would purchase an investment property as your first home. The idea is to then use your rental income to help pay for your own rent, which would allow you to live in a comfortable rental while building up equity in an investment property – which you can later use to help purchase a more expensive home to live in later on.
While there are a lot of advantages to rentvesting if everything goes smoothly, you do need to still factor in how your tax obligations will change. Also, a lot of rentvestors overlook the costs of owning a property and renting it out. Make sure you can afford this strategy before taking on more than you can handle.
What Are the Pros and Cons of Property Investment?
There’s a lot to gain from property investment. You can increase your income, grow your wealth, and work to set yourself up for a comfortable financial future. Once you have more equity, you also open the doors to more possibilities for wealth building such as investing in other properties or having money to put towards other types of investments.
However, there are also drawbacks and risks you should be aware of. Property investment requires a lot of research, planning, and commitment. It’s not the type of investment you just purchase and forget about. You also aren’t guaranteed to make a profit all the time, or even at all.
Here’s a look at the pros and cons of being a property investor:
- Property can be a smart investment if you have a high income because of all the money you can save through tax deductions for things like maintenance costs, renovations to the property, insurance, and loan interest. Often, you’ll be able to decrease your tax responsibility while accumulating a very large and valuable asset.
- Compared to other types of investment, such as stock market, property is a relatively stable investment. And, you’re likely to get a higher return than you’d see with other fixed investments such as bonds. Property offers a nice balance between stability and high returns.
- Property offers excellent long-term growth potential. Not only can you benefit from adding rental income to your normal income, you’ll also benefit from capital gains, especially if you hold on to your investment for a long time. As long as you purchase your property in a good location, you stand a good chance of seeing a huge increase in value over the years.
- The flexibility to meet other financial goals. Depending on the details of your investment loan and what you earn in rental income, your property investment can be used as a tool to help you reach other financial goals. You can use the equity to apply for more financing in the future and the income to pay for things like other investments, your business, and to help fund your retirement.
- While there are tax advantages, you’ll also have to keep in mind the extra taxes you’ll owe. Capital gains tax, in particular, can end up being a lot of money. It’s a good idea to factor this in when planning ahead.
- There are a lot of ongoing costs you’ll have to take care of such as maintenance, council rates, and property management fees. It’s a good idea to plan ahead for increasing expenses and to have money set aside for maintenance costs that will crop up such as roof repair, plumbing, and the general wear and tear of having tenants.
- It costs money and takes time to sell property. If the market slows and you suddenly need to sell your property, you may not be able to. Also, it will cost money just to go through the process. You may end up having to hold on to your property longer than expected in order to make a profit.
- There are risks. From gaps in tenancy or dealing with bad tenants, to poor property management services that end up costing you money and decreasing property values, there are a lot of risks involved. Make sure you understand what the risks are and have enough money to cope with any problems that arise.
How to Get Started with an Investment Loan
Ready for an investment loan? As long as you are a strong borrower, you shouldn’t have trouble qualifying for a loan. To get started, you may want to talk to a financial advisor about any risks you may face and create a plan to deal with those risks, and make sure you take the time to research the location and the type of property you want to purchase.
Because the lender you choose can have a big impact on how much your loan will cost and whether you will be able to qualify, definitely take the time to research lenders.
We can also help you find the right lenders based on your financial situation, investment goals, and borrowing capacity. Call us today on (07) 3146 5732 or fill out our online enquiry form and we can discuss your options.