Investment home loans

Investment Loan Basics

Find out everything you need to know about getting an investment loan. Learn how to maximise your borrowing power.

| | 10 minute read

Investment loans can be harder to get than other types of loans, but this shouldn’t discourage you. With the correct approach and good advisor, you can get the right deal for you. Find out how.

How to Qualify for Investment Property Loans

Investment loans usually have the same features as other loans, including 100% offset, interest only repayments, or redraw.

All loan types are available as investment loans, including basic loans, lines of credit, or professional packages. Discounts are applicable.

But investment loans come with more requirements than home loans. Because lenders consider them higher risk, they request a clean credit history, savings, and more. You will increase your chances of getting an investment loan if you have…

  • At least 5% of the loan amount in genuine savings (the more the better)
  • Stable employment
  • A clean credit history
  • A superior credit score
  • Equity in other properties, especially if your loan to value ratio (LVR) is more than 90%

For lenders, the more you borrow as an investor, the higher the value you have as a client. However, most banks see investment loans as risky, which is why they tend to be selective about who they lend to.

Why Investment Loans Are Harder to Get

When banks need to sell an investment property to recover debt, they often run into problems with the tenants. Some tenants may refuse to move out. Others may even damage the property in anger.

Also, lenders assume that if you experience financial difficulties, you’ll be more likely to pay your home loan to save your home rather than your investment loan.

For these reasons, most banks have strict guidelines for investment home loans. They also call for a larger deposit. Getting an investment loan with a 95% LVR is a lot harder than getting a similar loan for an owner occupied property.

However, some lenders are more flexible about this type of loan than others. At uno, we can help you find lenders that offer 95% investment loans.

Property Types and Requirements

When it comes to investment loans, banks do not accept all property types. Your property should be a house, townhouse, or standard unit.

Moreover, the property should have a living area greater than 50m². It should be located in a major city or town with over 10,000 inhabitants. Also, it must be in a good condition.

If your investment property doesn’t meet these criteria, you may want to talk to an expert to find out whether other options are available for you.

Know What Influences Your Borrowing Capacity

When lenders assess investment loan applications, they consider many factors. For example, while all lenders take your base salary as a starting point, they assess self-employed income, bonuses, rental income and allowances differently.

Here are a couple of other things you should know.

  • Some banks use 100% of your rental income in their evaluation, while others use only 80%.
  • Most banks add up to 2% to your current rate to calculate your borrowing capacity. They do this to make sure you can withstand increases. Others use the actual rate if it is fixed for 3 years or more.
  • Some lenders use both principal and interest repayments to assess repayments on your debts, even if your application starts off with interest only repayments.
  • Not all lenders consider your negative gearing benefits when calculating your ability to repay the loan.

Based on this insight, you can increase your chances by choosing the right lender. You might also consider fixing your current rate or looking to buy geared investment properties. Also, you can apply jointly with your spouse, so that the lender assesses your combined income.

At uno, we can help you find the right lenders and get a quick answer to “How much can I borrow?”

How Much Can You Borrow?

With the right investment lender, you can borrow 95% of the purchase price of your investment loan. In other words, you may only need a 5% deposit and a similar sum for purchase costs. It’s important to remember that lenders will consider high LVR loans to be risky.

By contrast, when you borrow below 90% of the property value, lenders consider you a lower risk borrower. Getting approved should also become easier.

You should also know that some mortgage insurers limit their loans to 95% of the property price plus lenders mortgage insurance (LMI), which increases the mandatory deposit by around 2%.

Some lenders have agreements with mortgage insurers and can lend up to 97%, LMI included. But these are few and far between and usually hard to find.

Maximum Interest-Only Term

Interest-only investment loans can allow for a better cash flow in the short term. This, in turn, gives investors the flexibility to invest their returns more freely.

While the maximum interest-only term in Australia is 15, most lenders only offer a 5-year term maximum. Only a handful offer a 10-year term. You can count the ones offering a 15-year term on one hand.

Negative Gearing

Negative gearing occurs when your running costs, as well as your interest, surpass your investment income. It is calculated at the end of the year. With a high taxable income, the benefits of negative gearing can exceed your holding costs.

This strategy may help you to increase your investment income over time to make up for other expenses. Until that happens, you may turn the net loss into a tax deduction against your other income.

For more information about negative gearing, you should seek professional financial advice

Benefits of Investing in Property

While investing in property is not without risks, it also has undeniable benefits. Perhaps the biggest benefit is a considerable return, but there are many others:

  • Ongoing income – The constant returns that property investment rental income can bring investors can be significant.
  • Provides security – Investing in property is generally safer than investing in stock. Fixed returns on investments makes it very attractive for many investors, whether they want to diversify their portfolio or not.
  • Value increase – Properties in a good location can rise in value over time, sometimes significantly. This rewards investors who opt for a long-term investment strategy and maintain the property well.
  • Helps secure additional finance – Properties purchased through investment home loans can be used later as equity for other loans. In this way, the property you invest in becomes a valuable asset.
  • Lower taxes – As a property owner, you can claim tax deductions for maintenance, insurance, and more. But if you don’t have full rights over the property, these tax reductions may not be available.

Disadvantages of Investing in Property

Investment home loans and other types of property investments are not without their disadvantages. Before applying for an investment loan, you may want to consider the possible drawbacks. Weigh them against the advantages to see how you stand.

  • High purchase cost – Buying and maintaining an investment property can be more expensive than buying a home. At the same time, you need to factor in taxes and maintenance fees, which further increase costs.
  • Harder to move – Like any type of property, an investment property may take a while to sell. Even if the property is in a good location, you may still have to wait a few months before you get the price you want for it. Shares, on the other hand, can be sold more quickly.
  • Temporary vacancy – The property, or a part of it, may remain vacant at times. This leads to periods when the rental income is lower than mortgage payments. You will then have to cover the repayments from your own pocket.
  • Depreciation – If, for whatever reason, the value of the property falls below the price you paid for it, you may be in for a big loss. Property investments are considered safer than stock market investments but, even so, properties may lose value over time.
  • Taxes & other costs – Taxes may be a bigger issue for some properties in certain areas than for others. It is very important to consider the long-term tax implications for the property you want to invest in.

Property Investment Costs

When you buy a property, you have to cover different ownership costs. These can add up to a sizeable amount, which is why you need to be aware of them early on.

  • Valuations – The property you want to purchase may require a valuation, inspection, and property research. These surveys inform you about the property’s market worth and rental potential. You may have to carry out all these on every property you consider purchasing.
  • Stamp duty – Varies from state to state, but can be as high as 6% of the property price.
  • Property title – After you buy the property, you need to transfer the property title on your name.
  • Legal fees and conveyancing costs – Usually paid for home purchases, these aren’t always mandatory for investors.

Ongoing Property Costs

In addition to the purchase costs above, expect additional costs once you own the property. The most significant of them include:

  • Maintenance costs – You have to pay for repairs, replacements, and other services. These may include plumbing repairs, pest control, or fixing broken windows. While property maintenance is tax deductible in Australia, aesthetic improvements are not.
  • Rates – If you rent out your investment property, you need to pay the water bill and other council rates and taxes.
  • Levies – You may have to pay fees to any individual(s) who use funds for the maintenance or repair of the property.
  • Insurance – Most properties need to be insured against damage. However, you can have control over the extent of the insurance and, therefore, over the cost of the insurance.
  • Interest – Interest on an investment property can be expensive. It’s important to factor it in when calculating rental income from your property.
  • Agent fees – Unless you manage the property yourself, you may have to pay fees to the agent who does.

Why Investment Loans

Investment loans can be rewarding for investors who are looking for a new passive income. These loans can diversify an investment portfolio, as well as consolidate it.

In addition to high returns, an investment property can also have important tax benefits. The interest you pay on an investment loan is tax deductible. This, in turn, can lower the holding costs for your property.

With an investment home loan, you might also be able to borrow more than with a standard home loan. This allows you to buy a property, turn it into a lucrative rental business, and move in later. You also create equity you can invest in other business ideas.

For these reasons, some homebuyers choose to buy an investment property before they actually buy a home. Many prefer residential loans, which are cheaper.

When you use your home or another investment property as a security for an investment loan, you can cut down the interest. Get all the information you need to make a safe and informed decision. Learn more about investment home loans from our expert!

What to Do Next

uno is your go-to service for all types of online loans, including investment home loans. If you’re wondering “How much can I borrow?” or need an accurate loan calculator, we can help.

  • Get advice about the investment loans you can take
  • Calculate how much you need to borrow to buy the property you want
  • Talk to an expert to find out all you need to know about investment loans

This information is general in nature, and you should always seek professional advice when making financial decisions.

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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.

Home Loan Types Investing

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