Kathryn Lee - 18 May, 2020
They say that earth is the best investment on Earth, and that is certainly the case in Australia’s competitive property market! Investment properties are one of the only assets you can invest in that are almost guaranteed to increase in value over time. So, if you’re looking to start growing your wealth in 2020, purchasing a rental property is one of the best avenues to go down.
That said, it’s important to keep in mind that getting a loan for an investment property is a completely different ballgame to an owner -occupier loan. While it may not feel like as monumental a decision as buying a home to live in forever, it comes with its own unique set of challenges and considerations.
That’s why we’ve put together this ultimate guide to buying an investment property in Australia,. From questions like “how much can I borrow for an investment property” to “how do I qualify for an investment loan,” we’ve got all the FAQS covered.
The requirements for getting an investment loan tend to be stricter than getting a mortgage for a home to live in. In 2014, the Australian Prudential Regulation Authority (APRA) introduced a home investment cap that made it more expensive for banks to give out investment home loans — in response to fears that this type of investment was growing too quickly.
While this was scrapped in 2018, many banks still remain cautious about minimising their risk with these types of investments. As with any type of home loan, you’ll generally need to have at least 20% of your property’s price saved for a deposit. If you already have an investment loan, you may need to have more set aside for a deposit than if it was your first purchase.
Banks will also take into consideration the potential appreciation of your property (how much the value will go up over time), so you may want to review information like vacancy rates and housing price trends in the area. As qualifying for an investment home loan can be a little more complicated, it’s best to work with an experienced mortgage broker to ensure you have all the necessary information ready.
As with any type of loan, the amount you can borrow depends on the strength of your application — otherwise known as your borrowing power. This is based on your annual income and expenses, as well as your debt obligations and other financial commitments. The good news is, some banks and lenders will sometimes approve a higher loan amount than an owner-occupier mortgage, as they’re taking into account the income you will generate from renting out the property. All lenders have different criteria and limits when it comes to determining how much you can borrow.
When it comes to purchasing a home to live in, many buyers like to have as large a deposit as possible to reduce their mortgage repayments and the amount of LMI (Lenders Mortgage Insurance) they will have to pay. However, as investment loans can often be claimed as a tax deduction, property investors generally have less incentive to fork out a large deposit. Still, many lenders will still require a deposit of between 10 to 20%. If you’re already a homeowner, you may also be able to forgo your deposit and instead use the equity you already have in your home (the amount your property has already gone up in value since you purchased it)
Since the ARPA lending restrictions were loosened in 2018, investment home loan rates have improved across the board. However, there is still a lot of variation in rates, depending on what lender and package you go with. It can be tricky finding the best home loan rates online, because most banks don’t advertise their cheapest loans and these can change over time. So, the best way to find the best investment loan rates for your individual situation is to work with a broker. They will have a strong knowledge of the different home loan rates on offer and may even be able to secure you a better deal.
However, in order to determine whether purchasing an investment property is right for you, it’s also important to consider the disadvantages. These include:
There are various expenses involved in purchasing an investment property.
In order for your loan to be processed, you will need to have your sales contract and other legal documents prepared by a conveyancer or solicitor. This will likely cost anywhere from $500 to $2200. While this may seem like a hit on the wallet, it’s important to invest in a professional to do this, to avoid expensive mistakes in your paperwork!
Stamp duty is a tax charged by your state or territory government on the purchase value of your home. The amount you will have to pay depends on where in Australia you live, and the type of property — for example, is it an established home or new property? To get an estimate for how much you will need to pay, check out eChoice’s handy stamp duty calculator.
Mortgage registration fee
Another fee that often sneaks up on people is the mortgage registration fee. This is a levy paid to the state or government, to register your physical property as security against your loan. The cost of this varies from state to state, ranging from around $116 in Victoria to $187 in Queensland. Be sure to check out the mortgage registration fee in your local area, so you know how much you will need to pay.
Building and pest reports
Before you commit to buying your property, you’ll want to know exactly what you’re investing in — even if you’re not going to the one living in it! So, investing in a pest and building report is essential. Here, a qualified inspector will check the structural integrity of the building, as well as ensure you won’t need to pay for any expensive termite or rodent extermination in the future. These are normally done together and cost around $600, however it may be more if you live in a regional area.
Your lender will want to get a good idea of the value of your home (and projected growth), especially when it comes to investment properties. While some lenders cover this cost, you may have to fork out around $100 to $300 for an external valuation.
To save you time and ensure you’re getting the best possible return on investment, it’s a good idea to hire a real estate agent or property manager. They will help you manage your property and ensure you have a suitable tenant renting your property. They may also manage any potential issues with tenants on your behalf. These fees are normally charged as a percentage of your weekly rent, between 5 to 12% depending on the company and where you live.
Home loan application fees
Yes, believe it or not, some banks will charge a fee just for applying for a mortgage! While this depends on the lender, it will normally be a one-off fee of around $200 to $700. However, you may be able to ask the lender to waive this fee. This is why it’s best to work with a mortgage broker, who will help you navigate this tricky negotiation.
Lenders Mortgage Insurance (LMI)
You will normally have to pay Lenders Mortgage Insurance (LMI) if you are borrowing more than 80% of your property’s purchase price.
Usually, this is a one-time fee that may be included in your overall amount. You can check out eChoice’s LMI calculator to get a better feel for how much you LMI you could need to pay your investment property.
Related Article: Understanding Lender’s Mortgage Insurance
Still wondering whether investing in earth — and the property on it — is the best investment on earth for you? Or, maybe you’re still puzzling over how much you will be able to borrow for your investment property, exactly? Whether you’re a newbie property investor or already have an existing property portfolio, working with one of eChoice’s friendly brokers will help ensure you make the right choice for you.
Words by Emma Norris
Are you feeling stressed about your mortgage? Be proactive and contact eChoice today for a consultation. Our brokers have access to hundreds of home loan products and will be able to find you a competitive mortgage.