Tips for investing in property in Australia

Tips for investing in property in Australia

Are you looking to build your investment property portfolio but not sure where to start or whether your current structure is actually working for you? Don’t hesitate to read this in depth article outlining some tips that can help you understand what lenders look for when they consider lending you large sums of money. Lenders are always assessing the level of risk whether it be for an owner occupied loan or an investment loan. The lower the risk, the more comfortable they are with approving you for finance. If you are ever in doubt, don’t hesitate to get in touch with your experienced mortgage broker today to discuss further.

What do lenders look for?

Some of the things a lender will look for when assessing your situation and the ability to borrow and repay the specified amount of funds are but not limited to:

·      Rental Income

If the security is an investment property purchase or investment refinance, you will need to show evidence of the amount the property is currently renting for or if the property is not currently rented how much the property has the ability to rent for – this will need to be proven by a rental appraisal from a licensed real estate agent.

·      Property Value

The value of the property, this can usually be done by organising an independent valuer to go and appraise the property along with providing a completed report or a computer automated valuation.

·      Property Location

The location of the property, if the property is in a rural area there is generally postcode restrictions where lenders will have a lower maximum LVR – this can sometimes occur in certain residential suburbs.

·      Loan to Value Ratio

The total LVR for the proposed home loan as this can have a part to play as LMI may need to be considered, and in other cases will indicate the final interest rate offered to you by the lender.

·      Financial Conduct

Proven evidence of savings history along with good conduct of bank accounts will need to be shown as the lenders want to feel comfortable in knowing you can make the repayments after settlement takes place. This eliminates the lenders having to fear the need of potentially going through the process to repossess your home as this is actually a costly and time consuming process for a lender to undergo.

·      Borrowing Capacity

Your borrowing capacity, this is demonstrated by proof of your income along with any assets and liabilities you may have as they want to know you always be in a position to keep making the monthly repayments.

·      Stress Testing

They will stress test your situation of your proposed loan repayment at a higher interest rate as well as any other financial commitments along with their minimum monthly living expenses.

At the end of the day if it falls within their risk profile, and the application is clean cut they will approve the finance application.

Special product offers for investors

The advertised interest rates on offer are not always the best rate a lender can offer you, this is where having a broker on your side can help you to achieve the best and most suitable product. A banks ability to offer special pricing discounts will fluctuate depending on their position in the home loan investment market.

The discounts offered at the time of applying are based on many contributing factors such as if a specific lender has a loan book that is too heavy with investors they may not consider offering much of a discount, if a lender has a  large amount of loans that are over 80% LVR the product offering is likely to not be as sharp, if the loan being applied for is based on IO repayments the discount is not likely to be as sharp however if the repayments are based on P&I repayments and for the purpose of owner occupied security they will likely consider offering a discount.

At times some lenders will come out with specials exclusively to target the investor market but if you are dealing with a qualified mortgage broker, they will advise which banks are currently offering the most suitable investment home loan product for your greater term potential as well as negotiate the best pricing for your situation.

Principal and Interest or Interest Only

With the way of changes taking affect daily many lenders are offering rates to investors with some aggressive discounts on offer providing the P&I option is chosen, while there is still the option for IO repayments not all lenders allow this for all loan products and situations and not to mention the rates offered are in some cases far from being a cost effective option.

An interest only home loan is a type of loan that only requires you to make interest repayments on the loan for a set period of time, usually up to five years. During this time, you do not have to repay the principal on the loan like you do in a Principal and Interest loan. With interest only loans after the interest only period has come to an end the loan will revert to principal and interest repayments based on the remaining amount over the remaining loan term not based on the thirty year loan term. This means the monthly repayment amount will be higher, unless you talk to your mortgage broker about your options to refinance.

Offset accounts and are they actually useful to you?

An offset account can be seen essentially as a transaction account that is linked to your home loan. Given the balance of your offset account is not in the negative, the positive funds in the account will offset daily against the money you owe on your home loan. This can reduce the total amount of interest payable on your home loan. For example, if your loan is $400,000 and you have $100,000 in savings, using an offset account to store your savings funds will mean you only pay interest on the outstanding home loan balance of $300,000. Given this action is set up and executed correctly you will see years shaved off your final home loan term.

Offset accounts will need a minimum amount mostly of $1000 to be able to take affect and work in the manner desired. If you have the ability to keep the balance of the offset account to a minimum of $3,000 it will work in your benefit. To experience the full potential of this exercise it will require strong discipline with your finances to ensure the temptation is not there to access the readily available funds.

Things to know about offset accounts that can help you:

·       Know if it is 100% offset account or partial offset account 

·       Ensure the offset account is actually linked to your home loan to work at the maximum potential for you

·       Know the fees associated with using an offset account

An offset account used correctly can be a cost effective option and can be a great strategy to reduce your home loan term. With the funds in offset you are saving on the amount of interest payable on your home loan saving you each month however if you have a savings account in place earning interest, over the financial year will mean you may have to pay tax on the amount of interest earned. If you are interested in an offset account or want to know whether your home loan has the ability to support this it is best to talk your mortgage broker to find out more.

If you have any queries or a question regarding specific information around property investment loans or loans in general, don’t hesitate to get in touch with our friendly team on 08 8344 9933 or email Jessica at jessica@financeprospects.com.au to find out more about the options available to you.