There are various ways to build wealth but Residential property has always been a popular investment option in Australia. Historically, residential investments have won their place in the hearts of Australian Investors. It produced satisfactory returns for a lot of investors.
Now, you want to follow the footsteps of successful residential investors and build wealth through property. But in order to do that, you must know what you’re in for.
With today’s competitive housing market, it is important to secure an affordable loan for your investment property to maximise the returns. A residential investment loan can help you to refinance an investment home loan from another lender or buy an investment property.
This article covers general information that you need to know before taking out a residential investment loan.
How does residential investment work?
It is important to know what loan features you need and what represents the most value for you when deciding on what type of loan you should apply for.
These loans have the added convenience of a redraw facility. This means you can decide if you want your interest rate variable, fixed or a combination of both. It also allows you to be able to decide on principal and interest or interest-only repayments. You also have access to other features such as 100% offset facilities.
Here are some questions you may want to ask yourself to know your specific loan needs:
- 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?
In general, Residential investment loans are more expensive than the usual home loans in terms of interest rates, appraisal fees and closing costs. You may be required to have a higher deposit which means your maximum loan-to-value ration will be higher.
Residential investment loan options
There are a variety of variable and fixed-rate investor mortgages that comes with a different application. Here are some of them:
- 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 an 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.
Each lender has a different unique format than others but here are some basic qualifying criteria
- 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.
For PAYG applicants:
- Recent group certificate
- Current employment letter
- 3 months bank statements
- Most recent tax returns
If you are self-employed, the list of required documents is a little more extensive. Don’t let this discourage you. If you are unable to provide all the documents below, there are other declaration documents you can use.
- Business activity statements
- A letter from your accountant
- 2 years of financial statements
- Certified tax returns and notice of assessment
How to apply for a residential investment loan
Due to the risk involved in non-owner-occupied properties, Investment home loans usually have stricter approval criteria compared to home loans. If you need negative gearings benefits to prove you have the capacity to repay your loan, it can become a more complex application. You will need to be in a strong financial position in order to qualify.
As part of the approval process, lenders will take into account the rental income received and the potential property appreciation over the course of the loan term as part of your ability to cover the mortgage. This can lower your debt-to-income ratio.
Once you’ve settled on a loan product the next step in purchasing your investment property is getting your loan pre-approved. A pre-approval is a stage of a loan application where you are not required to provide all the security. During this stage, your lender will pre-approve a maximum amount you can borrow based on your financial situation and the type of investment you’re making. This doesn’t cost you anything and gives you an advantage of knowing how much your repayments will be. This can help you compare to the rental in the are and maintain realistic purchasing budgets.
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