You’ve been living in your home for a while and you’re starting to think about the exciting step towards becoming a property investor. Approximately 2.1 million Australians own investment properties, which translates to around 18% of all households. The value of residential investment properties in Australia is estimated to be around $1.4 trillion. This accounts for a significant portion of the overall residential property market. As far as investment home loans go, investor lending constituted about 30% of all new mortgage lending in 2023, indicating strong demand for investment properties and for investment lending products.
So, when do you know if you’re ready to purchase an investment property? It generally comes down to your borrowing capacity and how much equity you have in your existing property. If you are wanting to buy a new property and keep your existing home as an investment property, it can definitely be done, and this is how a lot of people get started as investors.
If you already have an owner-occupied loan and are considering investing in property, we can help you to understand the best way for you to move to an investment home loan depending on your circumstances and your investment strategy. This guide will walk you through the key considerations and requirements to help you secure an investment loan successfully.
what is an Investment Home Loan?
Investment home loans are specifically designed for purchasing properties intended for rental income, as opposed to owner occupied properties. These loans can offer tax benefits and potential for capital growth, but they can often come with stricter lending criteria and higher interest rates.
What would be some key considerations for potential property investors looking at investment home loans?
1. Equity in Your Current Home
Equity is the difference between your home’s market value and the remaining mortgage balance. You may be able to leverage the equity in your existing home to secure a deposit for your investment loan. Lenders typically allow you to borrow up to 80% of your home’s value without Lenders Mortgage Insurance (LMI). You can read more about equity here.
2. Deposit Requirements
You can still borrow up to 95% in some cases for investment home loans, or you can use the equity in your existing property as security against the investment loan.
3. Loan Types
As per your standard owner occupier loan, you can decide to apply for an interest only or a principal and interest loan. This will depend on what your investment strategy is over time. Many choose interest-only options to keep initial repayments lower, especially in the early years of investing.
What Lenders Will Look For when assessing investment Home loan applications
1. Income and Financial Stability
Income Assessment: Lenders will evaluate your total income, including rental income from the new property (if applicable) and your current job.
Debt-to-Income Ratio: A key metric used by lenders, they generally prefer a ratio below 30-40%. Your existing mortgage will factor into this calculation.
2. Credit Score
A strong credit score is something lenders will be looking at. Ensure your credit report is up-to-date and address any issues before applying. You can read more about credit scores here.
3. Rental Income Potential
Rental Appraisal: Lenders will often require a rental appraisal to estimate potential income from the investment property, impacting your borrowing capacity.
4. Existing Obligations
Current Mortgage: Lenders will take your existing owner-occupied loan into account when determining how much additional debt you can manage.
Can I change my existing owner occupied loan to an investment loan?
Yes, you can, considering all of the lenders criteria are met. You may choose to keep the investment loan and your owner occupied loan with the same bank or go with another bank. The process will generally involve you making two new applications for each loan, one for the investment loan and one for the new owner occupied loan, assuming you are purchasing another property.
Benefits of using a mortgage broker for investment loans
As you start to consider buying your first investment property, whether you are going to use your existing property, or purchasing one, there are a lot of factors to consider and a lot of different ways to approach it. The best option will be unique to you and your investment strategy and goals.
As you begin your research into investment property financing in Australia, having someone experienced in this area is crucial to help guide you and avoid any costly mistakes. As Perth mortgage brokers, we can help you to navigate the options and get your property investment journey off on the right foot.
If you would like to know more about applying for an investment loan, or how much you can borrow, please book a discovery call with one of Perth’s best mortgage brokers today.
All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.
