It today’s competitive housing market it’s essential to match an affordable loan with your investment goals in order to maximise your property investment returns. A residential investment loan can help you to refinance an investment home loan from another lender or buy an investment property. The key word here is investment, so if you intend on occupying the property it is classified and an owner-occupied residence and if you plan on flipping the property for a profit or renting it out its considered an investment.
How does a residential investment loan work?
When deciding on what type of loan you should apply for, you should have an idea of what features you really need and what would represent the most value to you. These loans have the added convenience of a redraw facility and you can decide on an interest rate that is variable, fixed or a combination of both. You are also able to decide on principal and interest or interest only repayment terms and have access to other features such as 100% offset facilities.
Questions you may want to ask yourself to narrow down your specific loan needs would be
- Do I want the flexibility to make extra payments and do I need to be able to redraw these extra payments if needed?
- Do I want the security of fixed repayments each month and protection from fluctuating interest rates?
- Do I need an offset account to make my funds more accessible?
Residential investment loans are typically more expensive than residential home loans in terms of interest rates, appraisal fees and closing costs. You may be asked to provide a higher deposit which means your maximum loan-to-value ratio will be higher.
Residential investment loan options
There are a wide range of variable and fixed rate investor mortgages available, each with a different application.
- Professional Package loans offer discounted interest rates with variable, fixed rate or split rate loan options.
- Self-managed super fund Loans have more complex application criteria but if you plan to purchase an investment property through your SMSF you need to use a SMSF specific loan.
- Low Doc Loans suit those that may not be able to prove consistent income or if you are self-employed. Low doc loans require less documentation but can come with lower maximum LVRs and higher interest rates and fees.
- Bad credit loans are designed for those who may not have a clear credit history. To minimise the risk a lender takes on by granting these loans conditions will be more stringent and higher interest rates will apply.
- Bridging loans are short-term loans designed to purchase property before your existing property is sold. Due to the risk of not selling your property as fast as you may have anticipated these loans typically have higher fees and rates.
Call us now if you need help and support in selecting the correct type of funding to support your investment ambitions.
Residential investment loan interest rates and fees
Your loan-to-value ratio refers to the amount you need to borrow against the property value and this just one factor that determines your interest rates. While some lenders will finance up to 95% LVR, it is recommended that you save at least 10% since there are always additional costs that need to be covered when taking out a loan.
Fees refer to the charges you pay for the administration and establishment of your loan account
Standard administration fees would include conveyancing and legal fees, Government fees (including stamp duty) and loan establishment fees. Risk fees such as mortgage insurance should also be included as this can be as much as 2% of the amount being borrowed.
There are some costs that are even overlooked when during the property negotiations. Home building insurance prior to settlement, pest inspections and building inspections
If you’re interested in seeing how much you may qualify for, contact us here
Each lender will have their own application format, but some basic qualifying criteria would include
- Proof of consistent and stable income
- Proof of genuine savings of between 5% – 10%
- If this is not your first investment property and you are borrowing more than 90% of the property value some lenders may request to see equity in other properties
- A good credit record with an above average credit score.
Documentation required varies if you are applying as self-employed or an individual
For PAYG applicants these would include
- Recent group certificate
- Current employment letter
- 3 months bank statements
- Most recent tax returns
For self-employed applicants, this list of documents is a little more extensive. Do not be discouraged if you are unable to provide all the below documents for there are other declaration documents you can use.
- Business activity statements
- A letter from your accountant
- 2 years financial statements
- Certified tax returns and notice of assessment
How to apply for a residential investment loan
Investment home loans typically have stricter approval criteria compared to home loans due to the risk involved in non-owner-occupied properties. If negative gearing benefits are required to prove that you can afford the loan it can become a more complex application and you will need to be in a strong financial position to qualify.
You will need to demonstrate that you have sufficient funds to manage your mortgage as well as a deposit. If you already have an investment loan your management funds required may actually be higher than when you bought your first investment property.
As part of the approval process lenders will consider rental income received as part of your ability to cover the mortgage, this may lower your debt-to-income ratio. The potential for property appreciation over the course of the loan term will also be taken into account as part of your loan eligibility.
Once you’ve decided on a loan product the next step in purchasing an investment property would be to apply for pre-approval. A pre-approval is really a loan application where you are not required to provide all the security details at this point in the application process. Your lender pre-approves a maximum amount to lend to you based on a full assessment of your financial situation and the type of investment you’re making. This does not cost you anything and you have the advantage of knowing what your repayments will be. You can compare this to rental in the area and this helps maintain realistic purchasing budgets.
The actual loan application process can take anything from 3-6 week to process it really depends on the accurate and up to date supporting documents provided.
If you need help with ideas on how to increase your borrowing capacity call us today. We are able to provide you with simple, straightforward solutions suited to your individual loan needs.
Advice, tips and considerations
There is a significant difference in home loan rates for residential (occupied) residences and those for investment (rental purposes) it’s important not to misrepresent your intentions for the property use in order to gain a more favourable loan rate. This is considered occupancy fraud. Investment loans are considered susceptible to greater default on repayments and therefore higher fees are applied to these types of loans.
Frequently asked questions
How can I increase my borrowing power?
Every bank has a different way in which they asses’ investment property so look for a lender that encourages investors and has favourable lending criteria, fortunately, there are a few things you can personally do to increase the amount you qualify for. First would be to buy positively geared investment properties, reduce credit card limits and fix your interest rates for 3-5 years. The final factor would be to apply for loans jointly with your spouse so that lenders are able to use your combine income.
What is positive and negative gearing?
When the rental income received is higher than your expenses and interest repayments a property is known as positively geared and the reverse happens when the expenses and income is less, its then negatively geared. This loss can be used as a tax deduction however its best to get financial guidance on this to decide if this is an appropriate financial management strategy for you.
Do I need an offset account?
If you have money in an everyday banking account, you may choose to move it into an offset account. You can link it to your variable loan or one-year fixed loan to help you save on interest charges. This will offset the amount you owe on your home loan, and you’ll only be charged interest on the difference.
Have a question? Get in touch
If you have been told by your current lender that you can’t borrow any more money to continue investing please give us a call since this may not necessarily be the case. We have 40 lenders on our panel and a few of these lenders are more flexible and can generally lend more than the major lenders.
We look forward to speaking with you.