Step 1: How Much You Can Borrow?
Before considering any property investment loan, it is important to work out how much you will be able to comfortably borrow without causing yourself too much undue stress should your circumstances change. This will also allow you to set a target price range in which to start looking and you may find that you may need to delay your decision to investing in property until you can increase your investment budget.
The rental income from your investment property will be added to your income when calculating how much your can borrow. For an approximation of your borrowing capacity, use our Borrowing Capacity Calculator and for a definative report on your borrowing capacity to take to your Accountant or Financial Adviser, contact us for an obligation free appointment.
Step 2: Calculate Your Loan and Purchase Costs
You will still require a deposit for an investment property and additional funds to cover the purchase expenses. The deposit required is generally between at least 5-10%. If you have existing property, you may be able to use your equity to cover some or much of the deposit. It is important at this stage to talk to us or your own broker about the different requirements of each of the lenders.
In addition to your deposit, there are also these costs associated with an investment property loan:
- Loan application fee
- Valuation fees
- Stamp duty and other statutory government charges - keep in mind that these are often higher for investment properties than owner occupied properties
- Conveyancing and legal fees
- Lenders Mortgage Insurance if you are borrowing more than 80% of the property value
Step 3: Investigate Your Investment Loan Options
Property investment loans are available to suit just about any investment strategy. The common loan options for property investment include:
- Prinicpal and Interest Loans - these are structured very similarly to owner occupied loans where you repay the amount borrowed and the interest
- Line of Credit loans - if you already own property and have equity, you can apply for a line of credit that allows you to use your existing equity as the deposit for your investment property
- Interest Only loans suit investors who are focused on achieving capital growth in the short to medium term, and often go hand in hand with negative gearing.
Investment Property Loans also have more flexible repayment options including the ability to pay interest in advance. It's important to speak to your Accountant or Financial Adviser about the best repayment option for your investment strategy.
Step 4: Consider A Pre-Approval
Getting an investment loan pre-approved will ensure you shop within your budget and will give you additional confidence during the stressful negotiations.
As you won't yet have a property to secure the loan against, a formal pre-approval works the same as a formal loan application, except without the security details. Essentially a Pre-Approval will see you reach the stage of "Conditional Approval".
Keep in mind that your lender will review your situation prior to granting formal approval so if your situation has changed between the granting of your pre-approval and your submission of the loan, you may be required to under go the lender's credit assessment again. This can be positive especially if your situation has improved over time. Contact us if you'd like to discuss obtaining a pre-approval for an Investment Property Loan.
Step 5: Find a Suitable Property
You may choose to purchase a residential investment property, commercial investment property, or even a holiday rental investment property. These are some important points to consider when choosing an investment property:
Location: is the property in a location that will be well-tenanted or is likely to experience property price growth? Remember, you're not living in the property so it may not be in an area that you would normally consider.
Demographics: is the property suitable for the type of tenants in the area, e.g. back yards for young families? Again, you're not living in the property so try to take the emotion out of the decision.
Infrastructure: are there transport, shops, cafes and schools close by?
Development: what capital improvement is earmarked for the area? For example a new shopping centre will bring more work options for possible tennants and lead to capital growth in the value of your investment.
We do understand the property market so if you have any questions about buying an investment property, please contact us.
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