Do you know that buying an investment property is one of the viable ways to increase your wealth? Though there may be risks and disadvantages, when you discover how property investing is a promising venture, you may want to assess your decisions and choices in life.
Property investing in Australia is a high-cost, low to a medium-risk way of generating money with high potential returns. The real estate market can be volatile, but property investing provides a hedge against inflation as real estate values appreciate over time.
This blog provides a guide to help our clients get the proper financing on an investment property. Read on and learn about financing for investment properties.
What Type of Loan is Best for Property Investing?
There are different forms of property finance, each of which has specific requirements before you can borrow the money. Understanding how each loan works is necessary to ensure the success of your investment and prevent negative cash flow from happening.
Let’s look at each loan type to help inform your decision and push you towards achieving financial freedom.
Conventional Banking Loans
This loan type is the most common financing option for real estate investing and requires that you talk with your trusted bank and provide the pertinent details. Conventional banking loans require good credit standing and may need you to disclose assets and liabilities with their corresponding documents.
Investment property home loan rates depend on your ability to pay the principal loan and the interest rates. Processing takes a few weeks to months, and your amortisation rates and payment schedule depend on the bank’s offers. Expect a higher downpayment rate of around 20%–25% and a debt-to-income ratio under 36% to ensure you can pay the interest and principal. The requirements for a conventional banking loan are usually stricter than other loan types. But because conventional loans work, they’re usually the go-to option.
Bridging loans are short-term investment home loans that are gaining popularity due to the speedy approval process and the high loan rate. This loan type works by acting as a ‘bridge’ whilst you’re selling your old property to procure a new one.
A bridging loan lender takes over the mortgage of your existing property and finances the purchase of a new property. Both of these mortgages result in a peak debt which you can pay off once you sell your current property.
When you successfully sell your existing property, the proceeds are paid off to the peak debt, and any remaining debt for your new property is the end debt. The end debt is a standard mortgage, similar to a conventional bank loan, and essentially the ‘true loan’ you’re paying for.
Here are some eligibility requirements for a bridging loan:
- Home equity—The more equity you have, the higher the amount of money you can borrow.
- The end debt—Bridging loan lenders expect to have an end debt to finance your investment. In cases where there is no end debt, expect higher fees for your loan.
- Maximum end debt—The general rule is that your end debt should not exceed 80% of the value of the new property lest you pay a Lender’s Mortgage Insurance.
- Sale contract for current property—The bridging loan lender will require a copy of the sale contract for your existing property for loan approval.
Home Equity Line of Credit (HELOC) Loans
If you own an existing property and have made the necessary repayments, you probably have built home equity which you can use for a line of credit home loan. A significant advantage of this loan type is the ability to access funds anytime you need them.
You can then use these funds to finance any investment you wish, such as property investing. Other uses include renovations, holidays or anything you want to invest in. The major downside to this is that your house serves as the collateral and with higher interest rates than other loan types, this can be a considerable risk. However, if more cash is coming in than going out, you can quickly pay the monthly loan account balance and maintain your line of credit or equity.
Fixed Rate Home Loans
As the name suggests, fixed-rate home loans require you to pay the interest rate at the time of approval or settlement for several years without the lender increasing or decreasing the interest rate. At the outset, this can be advantageous for you since there is a guarantee that there will be no increase in interest rates for a couple of years, making it easier to budget your repayments.
On the other hand, when interest rates fall because of lower inflation and your fixed interest rate is higher than the market interest rates, your repayments will remain the same, and you won’t be able to adjust it to a lower rate to match the low market interest rates. There are also penalties for an early payout of the loan.
Variable Rate Home Loans
Variable-rate home loans follow the interest rates set by the Reserve Bank of Australia and may fluctuate higher or lower depending on the current state of the economy. This means that when interest rates are lower, your lender can follow suit and provide you with lower repayment.
Variable loans also feature the ability to make additional repayments as much as you like and allow for redrawing or taking out the extra repayments that you did. These features make variable home loans more flexible than fixed-rate home loans. There are disadvantages, however, to this financing scheme, such as an increase in repayments when the market interest rates also increase.
How Do I Qualify for Investment Property Home Loans?
There are multiple ways to qualify for financing, which depend on several factors, such as the type of financing firm and the requirements.
Here are some of the general things you have to remember to qualify:
- Have a Great Credit Score—The higher your credit score, the higher the likelihood of qualifying for financing. Most investment property lenders will always look at your credit score for approval as this is their way to gauge if you can make repayments on time.
- High Downpayment—Paying a sizeable downpayment is a significant advantage since you’re essentially flexing that you can pay; thus, your lenders will offer better interest rates.
- Go to a Reputable Mortgage Broker—Mortgage brokers know the lay of the land and can offer you access to excellent loan terms. Reputable mortgage broker companies, such as Investorfi, offer personalised loan solutions to help you with property investing in Australia.
- The Cheaper, the Better—Property investing doesn’t entail buying an expensive property as you will only use this for rental purposes. The income you generate from these investments will allow you to hold on longer to your assets and provide the means to buy more properties.
Start Your Property Investment Journey with Investorfi
Property investing in Australia can be a lucrative venture and is one of the best investment options, bar the high startup cost. With the proper knowledge about property investing and investment property home loans, you can choose the best financing option that will fit your needs and solutions and help you finance your first property investment.
Investorfi can help you achieve financial freedom by recommending suitable loan terms to help in your investment venture and complement your investment strategy. We guarantee our brokers are experts and professionals in this field of finance and can bring you closer to that great Aussie dream. Contact us today.