Buying property is one of Australia’s favourite ways to invest. It can get you on your way to securing your financial future, especially when you plan your investment finance effectively.
One: Funding Your Deposit
Key to securing an investment mortgage is to demonstrate to the lender your ability to provide a deposit:
Cash Deposit
A cash deposit over 20% will give eligibility for most mortgage products. Lenders Mortgage Insurance for deposits <20% is possible, however it will limit your options and increase your repayments until your equity in the property is greater than 20%.
guarantor
Like an owner-occupier mortgage, you may be able to use a guarantor. Usually an immediate relation, the lender will use a portion of their property to guarantee your mortgage. It’s important the guarantor is aware of the risks if you couldn’t make repayments.
property equity
If you have an existing home and substantial equity in it, you can use part or all of the equity to fund an investment property. Remember, this will also increase the principal, and therefore repayments, on your existing loan so factor this into your overall budget.
Two: Demonstrate Your Ability To Make Repayments
Once you have determined the source of your deposit, you’ll want to look at how you will service the loan. Combined with your deposit, this will help you determine what sort of property your budget will allow. Lenders (and you) will want to assess:
INCOME
spending
employment
credit history
assets & liabilities
Three: Calculate Your Property Costs
After cash flow and outgoings, you’ll want to establish your general property costs to fine-tune your budget. You can also use this list for individual properties once you start your search.
Upfront costs:
Stamp duty
Lenders Mortgage Insurance (LMI)
Legal Fees
Building and Pest Inspections
Property Valuations
Renovations/Repairs
Utility Connection Fees
Leasing Fees
Ongoing Costs:
Mortgage Repayments
Council Rates
Strata Fees
Utility Bills
Property Maintenance
Repairs
Landlord Insurance
Property Management
Four: Decide On Your Loan Structure
Deciding between paying down principal to build equity or sticking to interest-only to minimise your repayments is a key consideration. There are pros and cons to both scenarios:
Interest-Only
Pros
Cons
Lower monthly repayments for the Interest-Only period
The principal amount will not be paid down, meaning you may end up paying more interest over the life of the mortgage
Interest payable on investment finance is tax deductible
Interest rates are generally higher on interest-only mortgages
You may get good ROI for less output if you sell before the end of your interest-only period, assuming the property increases in value
Repayments will immediately become higher once your interest-only period ends
As you are not paying down the principal, building equity relies on property market increases
Principal & Interest
Pros
Cons
Pay less interest over the life of the mortgage
Repayments on P&I mortgages are higher than their interest-only counterparts – however, this also builds equity
Interest rates are comparatively lower to interest-only rates
If you’re looking to sell on the property in the shorter term, P&I may not be as tax efficient
You’ll pay down the loan sooner to own your investment outright
Strategic finance is key to unlocking financial security and a good ROI on your investment property. We recommend using a knowledgeable credit advisor who can support you and your investment throughout the life of your mortgage.
