You're probably wondering what your options are when it comes to financing property investment.
The decision to apply for an investment loan or use the equity from an existing property is not straightforward. Neither is it simple to understand whether your loan application will be accepted or knocked back.
The bottom line is that your financial circumstance and investment plans should inform your loan choice. Loan features like offset or line of credit might help one investor save time and money but hold less value for another investor.
Speaking to a qualified mortgage broker can help cut through the clutter. Whether you're investing to get rental income, equity or tax savings, your Yellow Brick Road representative can advise which loans will best suit you. Here are some of the issues we'll discuss with you.
Debt to income levels are important
If a borrower has debt that is greater than six times their income, the lender is expected to restrict the amount they're allowed to borrow.”
From July 1 this year, the Australian Prudential Regulation Authority (APRA) will lift its cap on investment lending.
The cap, introduced in 2014, has resulted in higher interest rate and deposit requirements for investment loans. Now APRA is looking to lenders to lead the way in developing strict standards for loan serviceability.
If a borrower has debt that is greater than six times their income, the lender is expected to restrict the amount they're allowed to borrow. These limits are to take into account your total borrowings, rather than just the loan you're applying for.
You can expect loan-to-income (LTI) limits to take on increased importance. Some lenders are already using income levels to cap how much you're allowed to borrow.
Have your home valued if you're using its equity
It's possible to use the equity in your current home to buy an investment property. Equity is the difference between the market value of your home and the amount you still owe on your home loan.
Always have a property valuation done before you start making plans to use your equity because your home might not be worth as much as you think.
Also keep in mind that having equity alone will not guarantee an investment loan, as lenders will also look at factors like income, age and credit history.
You won't be able to use all your available equity. It's a precaution to protect the lender, but it also benefits you by leaving you with a buffer of funds should things not go according to plan.
Interest-only loans suit some situations, but not all
There are benefits to interest-only loans if you're aiming to use negative gearing. Because you’re not paying off any of the debt on the property, the repayments are claimable as a tax deduction.
Once you start paying both principal and interest, only the interest component is tax deductible.
When the property’s value goes up enough over time (capital growth), you can sell the property and use the money to pay off the principal while still making a profit.
The risk with interest-only loans is that if there is no capital growth you will make a loss on the investment if you have to sell.
If you want to build equity without relying on capital growth, an interest and principal loan is considered a safer choice.
There are many more options to consider when financing investment property – call us now to discuss.