How To Get A Home Loan As An Investor
Australian residential property continues to be one of the strongest performing asset classes for investors.
Over the last 25 years, house prices in Australia have continued to increase at a steady rate of 6.8%, making owning an investment property both a popular and lucrative option for Australians.
Prior to the recent COVID-19 slowdown, property experts predicted the return of the housing boom, as Melbourne property prices continued to rebound strongly. So despite what people may assume of the current pandemic’s effect on the property market, there are still plenty of experts suggesting it is still a good time to be buying an investment property in Australia.
For property investors, arguably the most important stage of the process is usually securing a loan to finance the purchase of their first investment property. While there are subtle differences between home loans for investors and loans for people to live in (owner-occupiers), the process of getting a loan is very similar.
What are the differences between home loans for investment vs. owner-occupiers?
A home loan for investment operates in a similar manner to an owner-occupier loan, however, there are a few subtle differences.
Generally speaking, investment loans attract slightly higher interest rates than owner-occupier loans. Investment loans also have modestly higher fees. This is because investment loans are considered slightly riskier than owner-occupier loans.
There might also be some differences in the deposit you are required to put down on a property to be able to access an investment loan.
With owner-occupier loans, it is possible to get very high loan-to-value ratios (LVRs), as much as 95%, and banks and lenders will often accept various forms of collateral including guarantees from parents to help their children enter the property market.
For the most part, these types of loans are less accessible to investors and lenders generally like to see a 20% deposit. However, there is still the option to get a higher LVRs, but they will come with lenders mortgage insurance which comes into effect for loans with LVRs over 80%.
Another key consideration for investment properties and loans is that it is unlikely that you would be eligible for some of the major government incentives, such as stamp duty exemptions or the first-home owners grant. However, potential investors can still access these incentives, they will simply need to purchase and occupy the home for a period of time, prior to making the shift to renting it out as an investment.
Advantages of Investment Loans
The key advantage when it comes to getting a home loan as an investor comes down to the fact that you can include the potential rental income which boosts your serviceability.
It doesn’t matter what type of loan you are looking to get, lenders assess both your income and expenses before they will approve your loan application. They do this so they can be sure that you are able to meet your loan repayments based on your income.
For owner-occupiers, they will need to be able to meet 100% of the ongoing loan repayments. However, investors have a big advantage here as they can include future rental income, which can dramatically increase your ability to borrow money from a bank.
It is worth noting that banks will only assess between 70-80% of rental income, as that takes into consideration periods of vacancy for the rental property, property management fees and ongoing maintenance costs.
Another big advantage when it comes to getting investment loans is being able to access the equity in other properties. If you currently own your own home, and that property has appreciated in value, you are able to tap into that equity and use that as a deposit on an investment property.
Different Types of Investment Loans
These days, banks offer a huge variety of home loan products to suit all types of investors and their personal situations. However, there are a few key types of loans you should consider.
An interest-only loan is a product that lets the investor only pay off the interest and not principal. While this might seem like a bad idea as you are not making inroads into actually owning the home, there are some important reasons why this is actually a good option.
When you are applying for your investment loan, you will be able to borrow more money if you only need to make interest payments. That is because your weekly or monthly payments will be lower, enabling you to potentially own an investment property when you otherwise could not.
Over time, given the strong returns, we’ve seen in the Australian residential property market, the capital growth will allow you to effectively pay out the loan as the value of your property appreciates over time. A quick rule of thumb is that property prices double every ten years, meaning that by simply holding a property, you will have paid off the debt without ever needing to make a repayment of the principal.
There is also the option for fixed rate vs variable rate loans. For the most part, investors will be better off simply sticking with a variable loan as in the current environment, fixed-rate loans have a higher interest rate, given the low overall level of interest rates.
However, it is important to note that many banks offer a very low introductory offer to new applications and in the current environment it’s possible to secure a very attractive interest rate, if you are looking to take out your first investment loan.
Another type of loan to consider is for those looking to buy land and build. There are house and land loans that you could access for this purpose, or you can get two separate loans – a loan for the land and the construction loan. You can even access loans easily though your custom home builder in Melbourne or Canberra, so it’s worth talking to them if you are looking to build an investment property.
“So, how do I get an investment loan?”
To put it very simply, these are the typical steps on how you would get an investment loan:
- Save for a deposit. Most lenders will like to see a 20% deposit, however, you can still access higher LVRs (above 80%), but you will need to pay Lenders Mortgage Insurance.
- Speak to a mortgage broker who can assess your income and expenses and give you an idea of what you will be able to borrow.
- Assess future rental income. Speak to a property manager who specialises in the area you are looking to invest and get an estimate of comparable rental incomes. This will help you in borrowing more money for your investment property.
- Consider interest only. Not only will you be able to potentially borrow more money, but the loan payments will be lower.
If you’re looking for builder that understands the property market, Achieve Homes is the builder for you. As experienced custom home builders in Melbourne and Canberra, you can trust us to build a quality home for your investment that suits your budget and fulfils your requirements.
Get in touch with our building experts today at email@example.com or 1300 234 432.