Investment loans differ from owner-occupier home loans when you consider the extra income and expense streams they can add to your cash flow. There’s also a difference between how much you can borrow and how much you comfortably should. Here are some things to consider when thinking about an investment property.
Know the ins and outs of your cash flow
In a perfect, neutrally geared world, an investment property would pay itself off at a fixed rate over the course of 20 or 30 years, leaving you with a permanently stable investment portfolio. In reality, you need to consider your incoming and outgoing cash flow before pursuing an investment property loan.
The deposit
First things first, you’ll probably need a deposit of 10 to 20% or more of the final property price before you purchase. This can be a cash deposit but if you have equity in another property (for example the home you live in) you may be able to use this to count towards your deposit.
Most lenders will require you to pay Lenders Mortgage Insurance if you have less than a 20% deposit, further driving up the price of your home loan and potentially adding years to your mortgage repayments.
Ubank will allow you to borrow with a deposit of 10% of your property value without paying LMI when purchasing with principal and interest (P&I) repayments (Each application is limited to up to $2,000,000 when the loan to value ratio (LVR) is over 85%). For interest only loans, you’ll need a deposit that’s at least 20% of your property value.
Income, equity and expenses
When it comes to income, your household salary is a good starting point.
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 also want to leave some breathing room considering how interest rates can fluctuate over 20 or 30 years. So, evaluate your expenses against your income, and give yourself enough breathing room so you’re not in a panic when bills come around. Think of any existing loans, fees and charges and how long they occur for, as well as any dependents you have. 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 or 2 months ahead of their mortgage repayments while others might take out income protection or mortgage protection insurance in case of illness or death.
What’s the difference between an owner-occupied and investor loan?
While owner-occupied loans are for people intending to live in the property they’re purchasing, investor loans are usually for people wanting to rent their property out to others.
Investor loans will often come with slightly higher rates and stricter eligibility criteria because they are riskier to a lender. The uncertainty of the rental market means an investor can’t always guarantee their property will generate rental income, meaning it might be more difficult for them to make their mortgage repayments.
Use Ubank’s mortgage calculators
Don’t be afraid to use our borrowing power 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 considering 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.
