Can I afford an investment property?
Investment loans differ from personal home loans when you consider the extra income and expense streams they add to your cash flow. There’s also a difference between how much you can borrow and how much you comfortably should. Here’s some things to consider.
Finding your flow
In a perfect, neutrally-geared world, an investment property would pay itself off at a fixed rate over the course of 20-30 years leaving you a permanently stable investment portfolio. In reality, you need to consider your incoming and outgoing cash flow before pursuing an investment property loan.
So straight off the bat, you’ll probably want a deposit of 20% or more of the final property price before you purchase. Any less and you’re liable to pay Lenders Mortgage Insurance, further driving up the price of your home loan and adding years to your mortgage repayments (LMI doesn’t apply to UBank customers as our loans require a 20% deposit).
Income, equity and expenses
When it comes to income, your household salary is a good starting point, but if you’re self-employed you’ll need an activity statement from the last 12 months (at minimum). You can also unlock the equity of an existing property you own to help secure an investment loan. This is usually calculated as 80% of the value of your home (minus the amount you owe to the bank), but it’s usually recommended not to use it all at once.
Now for the expenses. Ever heard of rental stress? It’s classified as when rent payments are more than 30% of your income. The same goes for investment properties, but you’ll want to leave some breathing room considering how interest rates can fluctuate over 20-30 years. So evaluate your expenses vs. your income, with enough breathing room so you’re not in a panic come bill time. Think of any existing loans, dependents, fees and charges, and how long they occur for. A loan with 2 months left to go might not be as impactful as an expense with 2 years remaining.
Factor in the future
Investing in property is a long-term commitment and a lot can change in 20 years. You’ll want to factor in any significant known costs (like children’s school fees, travel plans or other investments) to ensure you’re prepared for them. It’s also good to have a worst-case scenario plan in place too – some people like to have a buffer zone of 1-2 months ahead of their mortgage repayments; others might take out income protection or mortgage protection insurance in case of illness or death.
Use UBank’s mortgage calculators
Don’t be afraid to use our mortgage calculator if you’re unsure how much you can borrow. This will give you a good idea of what you can borrow and what your repayments will look like once your loan is underway. You can then make a rational decision with the above factors to work out how much is responsible for you to borrow and how much could potentially put you into financial stress.
Taking on an investment loan doesn’t need to be scary; it’s just a matter of knowing your situation and crafting a strategy around it. When done effectively, this tiny bit of work at the early stages can save you thousands in the long run!