All of the basic information you need to know about investment property loans can be found on this web page. Fordetailed information, please contact us.
Investment Property Loans Process
Obtaining approval for investment property loans is a complex process which can take longer than expected.
Be aware that your application will require a minimum of four to six weeks to be processed and approved.
If you don’t have a loan pre-approval, you should start searching for a suitable loan as soon as you sign your Contract of Sale.
Information You Will Need to Supply to Lenders
The information that you will need to provide to a potential lender will vary from lender to lender. Information required is heavily influenced by each lender’s specific lending policies and internal practices. Lenders will require you to provide most, if not all, of the following;
1. Proof of Identification (Driver’s Licence, Passport, Birth Certificate)
2. Evidence of Income (Payslips, PAYG Statements, Tax Returns, Financial Statements)
3. Employment/Business History
4. Statement of Monthly/Annual Living Expenses
5. Statement of Liabilities
6. List of Assets
7. Credit Report
8. Copy of Contract of Sale for property purchased
9. Rental Income Estimate from Licenced Estate Agent
Investment Property Loans – Loan Amount
The loan amount is the amount you need to borrow to completely finalise the purchase of your investment property. In addition to the balance of the purchase price, your lender may allow you to borrow more funds to also cover some or all the following costs;
1. Mortgage Application Fees
2. Lender’s Mortgage Insurance
3. Government Stamp Duty
4. Legal Fees
Using a mortgage loan to cover these costs will prove expensive over the life of investment property loans. Unless other funds are simply not available, taking advantage of a lender’s willingness to accommodate this practice, is not recommended.
Investment Property Loans – Borrowing Limits
All lenders place limits on the amount they will lend to a property investor. Before you enter a contract to purchase an investment property, it pays to determine what your borrowing limit is likely to be with different lenders.
Unfortunately, many seeking investment property loans, discover too late that their borrowing limits are less than they require. This can lead to difficulties in meeting settlement requirements.
Your borrowing limits can be affected by many factors. These include;
1. Your base salary (not all lenders consider earnings from overtime, penalties, shift allowances etc when assessing borrowing limits)
2. Rent received (usually no more than 80% of the annual rental is considered as income)
3. Negative gearing benefits (not all lenders take these benefits into account)
4. Your living expenses (many lenders apply a percentage of your income to living expenses and this may be higher than your actual living expenses)
5. Credit card limits (regardless of the balance owing, the full limit of credit available on all cards will be regarded as debt)
6. All other debt including outstanding loans (if you have an interest-only loan on another investment property, some lenders will also add what would be therequired principal repayments to your expenses)
7. Stress testing for serviceability (many lenders will factor in a 2% – 3% rate rise when setting your borrowing limits)
8. Your Debt-to-Income Ratio
9. Your lender’s policy on Loan-to-Value Ratio (as lending on investment properties is regarded as riskier by most lenders, your borrowing limits may be less than they would be for an owner-occupier mortgage loan of the same amount)
Obviously, it pays to look at a range of lenders to determine which lender will provide you with the highest borrowing limit.
Debt to Income Ratio
Most lending institutions now utilise debt to income ratios when deciding if they will provide property investment loans to applicants.
Briefly, the debt-to-income ratio is the sum of your total debts divided by your total gross annual income. For example, if you have total debts of $700,000 and your gross income is $100,000, then your debt-to-income ratio is 7.
Financial institutions utilise debt-to-income ratios to limit your overall debt level. They do this to ensure you are not committing more than 30 to 40 percent of your total income to loan repayments. This ensures you can comfortably meet your repayment commitments and avoid future financial hardship.
Financial institutions will lend you up to a maximum of six to seven times your annual gross income. This is subject to you satisfying all their other requirements.
The Australian Prudential Regulation Authority (APRA), regard a debt-to-income ratio above 6, as being in the territory of risky lending by financial institutions.
Loan to Value Ratio
The Loan-to-Value Ratio (LVR) is the amount borrowed as a percentage of the value of the property purchased. For example, if you paid a $100,000 deposit on a $1,000,000 home, you’ll need to borrow $900,000 to finalise the purchase. Your deposit is 10% of $1,000,000, and if the loan were approved, your Loan-to-Value Ratio would be 90%.
For investment property loans, a Loan-to-Value ratio of 80% or lower is often set as the upper limit of the maximum loan lenders will approve. This means that in the example above the lender would not approve an application for a $900,000 investment property loan.
Types of Loans
1. Principle & Variable Interest
2. Principle & Part Variable Interest/Part Fixed Interest
3. Interest Only
4. Professional Packages
Understanding Loan Costs
All investment property loans have costs associated with them that you need to be aware of. Some are upfront costs, others are ongoing fees, and the remainder is one-off costs, incurred at the time of the relevant event. These costs can include;
1. Loan establishment fee
2. Mortgage Account annual fee
3. Lenders Mortgage Insurance fee
4. Offset Account Fee
5. Loan Portability Fee
6. Exit Fee
7. Break Fee
8. Discharge Fee
9. Additional Repayment Fee
Other Property Investing Costs
In addition to direct costs associated with obtaining investment property loans other costs that need to be allowed for include;
1.Valuation fees
2. Stamp Duty
3. Legal Fees and Conveyancing costs
4. Transfer of Title Fees
Choosing the right loan
As an investor, the ideal investment property loans are interest-only loans. This is because these loans are fully tax-deductible. Interest-only loans can be either fixed or variable and are offered normally for five-year terms. Which type of interest-only loan is best for you, will depend on your personal situation, and your assessment of the direction of interest rate movements in the future. Whilst interest-only loans usually revert to principal and interest loans at the end of the interest-only period, a new interest-only period can be negotiated with most lenders.
The main available alternative to interest-only loans is standard variable rate loans offered by most mortgage lenders. These loans offer a wider range of features and more flexibility to you as the borrower. Usually, the interest rate on standard variable rate loans is slightly higher than that offered for interest-only loans. The additional features may include;
1. Redraw facilities,
2. The option to apportion the loan so that a part of the loan is a fixed interest with the balance attracting a variable rate of interest,
3. The ability to make extra repayments at will, and
4. Loan portability.
Your personal situation will determine whether an interest-only loan is a right loan for you to fund your investment property, or whether the additional features and greater flexibility of a standard variable rate loan, will be more suitable.
Regardless of the decision you make, it will be advantageous for you to consider attaching an offset account to your loan account (assuming your lender offers this facility) to assist you to reduce the overall interest cost over the life of your loan.
Bank or Broker?
All major lending institutions offer investment property loans, and any of them will be happy to offer you an investment property loan. However, whether you are successful in obtaining final loan approval, will depend entirely on you being able to satisfy their specific lending criteria. You also need to be willing to accept the terms and conditions, associated with any loan, they may offer to you.
As experienced investors well know, you need to compare the offerings of multiple lenders, to find the right investment property loan for you. This can be a time-consuming process, even for experienced borrowers.
The mortgage broking industry evolved to provide advice and assistance to inexperienced, or time poor, property buyers looking for better deals.
An experienced broker can save you time, effort, and anguish throughout the lender selection, loan application, loan assessment, loan approval, and loan drawdown processes. As time is often the essence, when a property settlement looms and finance needs to be secured, a good broker, can make a real difference to the outcome achieved.
Most mortgage brokers do not charge for their services. This is because they are rewarded by the lending institutions that they direct your loan application towards, after identifying the loan product and the lending institution that provides the best outcome for you, given your circ*mstances and specific requirements.
Risks associated with Investment Property Loans
Nothing is free of risk, and taking on an investment property loan, is no exception. Some of the risks that you need to consider include;
1. Should the value of the property you have purchased fall significantly, and you need to sell it for any reason, you may find that the proceeds are insufficient to discharge your loan. You will then be indebted to the lender for the balance outstanding, without having the rental income to support repayments.
2. Should there be a complete loss or severe reduction in the rental income produced by the property, your ability to repay your loan will be compromised, and you may need to reduce your living standards.
3. Should interest rates increase rapidly, you may find it difficult to continue to meet your repayment obligations. You may then be forced to sell the property.
Conclusion
This webpage provides the basic information you need to develop an understanding of investment property loans. It is not definitive, as to provide information on all aspects of seeking and obtaining finance to finalise a property purchase, would require a comprehensive book.
Oz Lend suggests that if you are new to the arena of investment property loans, you should contact us and book an appointment to discuss your requirements.
