An investment property loan is a type of home loan to buy a property for investment. This is a quick solution for those who want to buy an investment property but without sufficient resources for the purchase.
The criteria for approval on investment property loans are complex. This is especially if lenders will require negative or positive gearings to demonstrate that you can actually pay for the loan. Lenders consider investment loans as high risk. Therefore you will need to provide a strong financial standing to be considered eligible.
People who borrow money to invest in a property is called gearing. If the income from your investment is less than the expenses, this is called negative gearing. Therefore, positive gearing is the exact opposite where your income from investment is higher than the interest on the loan and other expenses combined.
How to Find the Right Property to Invest In
Step 1. Assess your financial situation
The first step before applying for an investment loan is to look deep into your financial situation to see if you qualify for a loan.
- Do you have a sufficient deposit of at least 20% Of the investment property value?
- Do you have genuine savings, a cash deposit of at least 3 months in any bank?
- Do you have a clean credit history with good credit standing?
- Do you have a strong income resource and a stable employment record?
Step 2. Scout for a lender and compare rates and loan features
The first lender you would like to consider is your local bank. You may also want to check other lending institutions in your area. Make a list of 2 to 3 banks and financial institutions so that you can make a comparison.
This step can be a challenge because most lenders don’t freely advertise their best interest rates. So the best thing to do is to contact a mortgage broker who has access to this information. They can provide you a list of lenders who can provide the best interest rates. Alternatively, you can go online and search for websites that provide the best comparison of interest rates among banks in your area.
Step 3: Find out how much you can borrow
In searching for the right lender, you may also want to know how much you can borrow so that you have an idea how much your repayment is. You can use loan repayment calculators to give you an estimate of your monthly repayments.
Your borrowing capacity
How much you can borrow depends on your borrowing capacity. Lenders vary in the way they assess investment property loans. They look into your borrowing capacity and your financial situation which included the following factors:
- Rental income
- Other income
- Existing debts
- Negative gearing
Step 4. Find out what are the costs involved in property investments
There are a variety of fees required when you decide on investing in a property. Some of the costs are valuations, stamp duty, legal fees, conveyancing costs, and transferring of property title.
There are also ongoing costs involved such as council rates, bills, and other taxes. You may also want to consider maintenance costs, levies, insurance, interest, and agent fees. These fees may add up and may cost higher than expected.
Understanding all these fees and charges can help you plan and budget better. You may want to involve a financial planner during the process.
Step 5. Decide which loan is right for you?
In this step, you may want to get professional advice from mortgage brokers and financial advisors. They can lay out to you the type of loans that lenders offer investors.
There are various loan features and costs to be taken into account, for instance, home loan rates, redraw, mortgage offset, and continuing fees. There are several loans to accommodate varying needs. Getting professional help can provide you the right information you need to make the right decision.
Here are the different type of investment loans to consider:
- Principal and Interest loans – usually preferred by owner occupiers
- Interest only loans – usually preferred by investors
- A line of credit loans
- And other options
Step 6. Prepare the paperwork required by the lender
Once you have assessed your financial stability and found the right lender for you. It’s time to speak to the lender and ask for their requirements. Generally, all lenders have the same requirements with few differences.
Here are the common requirements asked for investment property loans:
Proof of Identification
-this includes passport, driver’s license, proof of age card. Or any two of the following – birth certificate, citizenship certificate, pension card, overseas drivers license, and household bills like phone or electric bill.
Proof of income
– If employed, prepare your account statements that show three months of salary, a payslip, employment contract or letter from your employer that details your base pay, income tax return.
– if self-employed, most recent business tax returns, most recent ATO notice of assessment
– other proof of assets (land title and others), bank statements
Step 7. Get a pre-approval
When you get a pre-approval from a lender, this doesn’t mean that you are approved of the loan. But this means you are provided finance approval only ‘in principle’ where you have met the lending criteria of the bank or lender. Pre-approval gives you an idea of how much you can borrow and provides you with a realistic amount to work with.
Step 8. Valuation
When you have finally chosen the investment property you want to purchase, a valuator will inspect the property. For low-risk investors, a valuator may not be required.
Step 9. Formal Approval, Loan offer, and Settlement stage
This is when the bank or lender decides that they have everything they need. It is at this stage that they approve your loan and release a formal approval in the form of a letter confirming their approval.
Once your loan had been approved, the lender will send you a loan contract to sign in order for you to accept their loan offer. At this point, they call your conveyancer to inform them that the funds are ready for the investment property you are purchasing. A settlement is done when the loan had been paid in advance.
The application process for investment property loans could be daunting but once you have received a pre-approval from the lender, everything will fall into place. To make the process a little less stressful, you can contact an experienced mortgage broker to help you through all the process.