Venturing into the world of real estate investment can be an exciting and lucrative endeavour, but it also requires careful financial planning and understanding, especially for beginners. If you’re considering your first investment property, this guide is perfect for you, as it offers a comprehensive overview of how to secure an investment property loan in Australia, outlining the key eligibility criteria and steps involved. By keeping yourself informed, you’ll have better chances of succeeding in the competitive Australian investment property market.
Eligibility Criteria
There are several key eligibility criteria you should be aware of when applying for an investment property loan in Australia. Understanding these will help you prepare for your application and increase your chances of approval.
Sufficient Deposit
To qualify for an investment loan, you need a minimum deposit, typically at least 20% of the property’s value. This is to avoid paying Lenders Mortgage Insurance (LMI), which protects the lender if you fail to meet your mortgage repayments. Some lenders may accept a smaller deposit, but this usually comes with the requirement to pay LMI.
Genuine Savings
Lenders often require proof of genuine savings, which means having funds accumulated in a bank account over a certain period, usually at least three months. This demonstrates your ability to save money and manage your finances effectively.
Clean Credit History
Having a clean credit record is crucial. Lenders will review your credit history to assess your financial reliability. A good credit score can significantly enhance your loan application, showing you are a low-risk borrower.
Stable and Sufficient Income
You also need to demonstrate a stable and sufficient income. Lenders will examine your income sources, including employment and any other regular income, to ensure you can comfortably meet your loan repayments. This assessment will also consider your disposable income after current living expenses to determine if you can handle the additional costs of property investment.
Stable Employment History
Having stable employment is another key criterion. Lenders will look at your employment history as an indicator of income stability. Continuous employment in the same job or industry can positively influence your loan application.
Good Financial Health
To assess your net worth and financial health, lenders will evaluate your existing assets and liabilities. These include any property, investments, and other significant assets, as well as your existing debts, such as loans, credit card balances, and other financial commitments.
Loan-to-Value Ratio (LVR)
The LVR is the amount of the loan compared to the value of the property. Lenders typically offer more favourable interest rates and conditions for loans with a lower LVR, as these indicate lower risk.
Application Process
Now, here are the steps to help you successfully navigate the process of obtaining a loan for your investment property:
1. Assess Your Financial Situation
Before you look into loans, it’s important to have a solid grasp of your financial standing. Determine how much you can afford by considering your income, expenses, and the equity you may have in any existing property.
2. Calculate Your Borrowing Power
Your borrowing power is influenced by your income, debts, and credit history. This figure is crucial, as it will shape your property search by defining what you can afford. You can get an estimate of it by using borrowing power calculators available online.
3. Save for a Deposit
Aim for at least a 20% deposit. If you already own property, you can use the equity – the value of your property minus any existing mortgage – as part of your deposit. Generally, lenders will let you borrow up to 80% of your property’s value, including the amount you still owe. Remember that the larger your deposit, the better your loan terms could be, potentially reducing or eliminating the need for LMI.
4. Explore Loan Options
Investment loans come with different features and rates than owner-occupier loans. Decide between fixed and variable rates, and consider whether you want a loan that allows for interest-only payments initially, which can reduce your outgoings in the short term but may increase long-term costs.
5. Get Pre-Approval
Securing pre-approval from a lender can give you a clearer idea of the amount you can borrow, streamline the property buying process, and make you more appealing to sellers as a serious buyer. Pre-approval involves submitting financial documents to a lender who will then assess your ability to repay a loan.
Note, however, that pre-approval is typically valid for a limited period only, and you still need to secure final approval once you choose a property. Final approval will depend on a satisfactory evaluation of the property and a re-assessment of your financial condition.
6. Understand Loan Features and Costs
Different loans offer various features like redraw facilities, offset accounts, and flexible repayment options. Weigh these features against potential costs such as application fees, legal fees, and ongoing account management fees.
7. Application and Approval
Once you’ve chosen a property and a loan product, apply for the loan. You will need to provide detailed financial information and proof of income, expenses, debts, and assets. Expect the lender to conduct a credit check as well.
8. Consider the Long-term Commitments
Understand the long-term financial commitment of an investment loan. Calculate potential future changes in interest rates, rental income from the property, and your own financial situation. Also, factor in the ongoing costs of property ownership, including maintenance, council rates, and insurance.
Final Thoughts
Securing an investment property loan is a significant financial decision that entails careful planning and consideration of both your current financial situation and your future goals.
Make sure to consult with financial advisors or mortgage brokers to tailor a loan that best suits your needs and provides the flexibility and security you require for your property investment journey.
