7 Things to Know About Investment Property Loans
Are you good with your finances and think you have an eye for investments?
You’ve thought about entering the investment property market, and now want to join other Australians who’ve had the same idea. Keep in mind investment property loans are different than homeowner loans.
Before you secure a loan and invest in a new property, you need to know these 7 things
Although the road ahead might seem complicated, we’re here to explain. We put together a list of 7 things you should know about investment loans. This breakdown will help you smooth the process.
1. Large Down Payment
Plan to put down a large down payment. The amount you need to put down will depend on the strength of your application.
It’s tough to find a lender who will let you borrow more than 80% of the property’s value, so you’ll have to come up with at least 20% deposit.
There are always ways around that number though. For instance, show some of your other properties have accumulated sufficient equity.
Remember, if you put down at least 20%, you won’t have to purchase LMI.
The down payment amount also depends on the institution you apply for.
Some lenders will let you borrow 85% of the value, but you will have to show proof of stable employment and income. You need to put down a 15% deposit and 5% in savings.
In some cases, you can make a strong case and qualify to borrow 90% of the property value. Ensure you have a clean credit history before pleading your case. The property also needs to be an easily sellable investment property.
Only a select few are able to borrow 90% of the property value. Their credit score should be perfect, and the property must be easy to sell. The borrower should also show a strong investment portfolio.
2. Check Your Credit Score
If you have a credit score lower than 726, your fees can spike through the roof. It will mean higher interest rates, lower loan to value ratios, and high lender fees.
If your credit is below average, you might not even qualify for a conventional home loan. Lenders are more strict when it comes to investment loans. Borrowers tend to default on their investment properties before their actual homes.
Borrowers tend to default on their investment properties before their actual homes. Lenders will want to ensure your credit history is clean, and you have not defaulted on any previous loans.
A lower than average credit score could be improved by reducing the amount owed in other loans. Ensure you also pay off any credit card debt.
3. Higher Prices
Fees and other expenses on investment properties are higher and there is no way around it. Not only will you have to put more money down, but you will also pay a higher interest.
Investors can pay 5-7% for investment properties, compared to 4% for home loans.
The percent you put as down payment will help determine your interest rate. Experts recommend you put down at least 30 percent in order to get the best rates.
Lenders tend to also charge up-front fees called ‘points’ for mortgages. When processing your loan, one ‘point’ can equal one percent of the loan amount.
Investment property loans do not come cheap, but the more you know about them, the better you can prepare.
4. Investment Property Loans Limits
Do you dream about owning 10 investment properties in the next few years? Not so fast, mortgage companies have investment property loan limitations.
Investors are limited to four mortgages under their name. Your credit score limits your options, the more loans you have under your name.
Keep in mind your credit score can limit your options. If you have several loans, they will affect your creditworthiness.
However, there are a few programs available which allow you to add 5 to 10 mortgages.
The program has some specific rules. It requires 25% down for single-family homes, and 30% for investment properties of 2-4 units.
It also requires six months’ payments as a liquid reserve. Your credit score also needs to be at a high 720+.
5. Don’t Forget About Equity
Home equity is the value of the house that you actually own. To calculate equity, take what you owe on the loan and compare it to what the property is worth.
For example, if your current investment property is worth $600,000, and you owe $200,000 on the mortgage, your equity would be $400,000.
If you borrow your equity, you could use it as a down payment for another property. Take advantage of this opportunity when your property has accumulated the most equity.
6. Cash Is King
Don’t underestimate the power of cash. As a property investor, you should focus on stockpiling cash.
Each property you invest on will set you back a considerable amount of money. Think about down payments, closing costs, renovations, and possibly legal fees.
Remember that investing pays off over time, and it’s not immediate cash. You need to do your part to save money in these initial stages.
If you don’t have have a plan to increase your cash flow, it could prevent you from moving onto buying your next property. Lowering your living costs could help you save the sufficient amount of money for your next property.
In the next point, we’ll discuss how owner-occupied investment property loans can help you stack up on cash.
7. Owner Occupied Mortgage
This type of loan will save you more money over other investment mortgages. To qualify for this loan, the building needs to hold up to four units.
Owner-occupied mortgages have lower interest compared to other investment property loans. The down payment is lower, varying from 3 to 5%.
To qualify for this loan, you must meet a few requirements. Investors have to move in within 60 days of closing, and they must live there for at least a year.
Another perk of owner-occupied loans is your remaining rental properties should cover the mortgage payments, meaning your personal cost of living should be minimal.
When the year is over, you’re free to move and rent out the unit.
The Bottom Line
You’re not alone. Other experienced investors at one point had questions about investment property loans.
As a trusted investment company, we’re here to guide you in the process. Our team provides support to help you maximize on investments. To learn more about our mission and more services we offer, visit or contact us.