‘How much can I borrow for an investment property?’ is one of the first questions asked by new investment property buyers. Lenders consider many factors before determining the amount they think investors might be comfortable repaying.
To help you better understand this complex topic, we’ve composed a comprehensive guide on all the basics of investment property loans.
Keep reading to find out more!
How Much Can I Borrow for an Investment Property?
The question that usually arises with buying an investment property is how much investors can borrow for an investment property. The amount you can borrow varies from lender to lender.
While most lenders allow you to borrow 80% of the purchase price, some may lend you up to 95%, though this is considered a high-risk loan for the lender. To get a loan as high as 95% of the purchase price, you will typically need to prove possession of 5% in genuine savings and equity in other properties. You should be able to cover the deposit, which would otherwise amount to around 20%, depending on how much you borrowed.
Investment Property Financing Requirements
Applying for an investment property loan is more or less the same as applying for a home loan; the only difference is that lenders are more rigid when granting an investment property loan as it poses a greater risk. Let’s take a look at some of the investment property loan requirements.
- Sufficient down payment for investment property – while some lenders allow a downpayment of 10% or 5% if you are an investor, most require a deposit of 20%. Naturally, the higher the deposit for investors, the better the interest rate.
- Proof of equity in other properties in case of a Loan-to-Value Ratio of 90% – if you plan on borrowing 90% or more of the total property amount, most lenders want to see your equity in other properties. They want to ensure that their resources are going to a capable investor.
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- Proof of possessing 5% – 10% in genuine savings – the lender needs assurance that you know how to handle your finances and will be able to commit to regular monthly payments.
- A good credit score and good credit history – indicate an exemplary potential buyer who is more likely to be approved for investment property financing than a person with a bad credit score and history.
- A source of income – stable employment shows lenders your source of income is long-lasting and that you will be able to repay the loan.
How Much Can I Borrow for an Investment Property – Calculator
Many property calculators on the internet help you get an idea of how much you can borrow for your first or next investment property. Some calculators require filling in some simple variables such as your monthly income and expenses, while others require more precise information.
But don’t rely blindly on online calculators. You’ll need to get pre-approved before you can know for sure how much you can borrow.
Factors for Assessing Your Loan Application and Borrowing Capacity
While there are no strict rules banks or lenders follow when assessing loan applications, each lending company has set its own criteria when looking into loan applications. That being said, most lending companies consider these factors when assessing an application.
Your Borrowing Capability
The borrowing capability is a rough estimate of how much money you can put towards repaying your loan. Your borrowing capability greatly depends on:
- Your yearly income
- Your expenses (monthly/ yearly)
- Your marital status
- Your savings
- The deposit you plan on putting down
These factors are then compared with the loan for which you are applying. With all these factors taken into account, they can calculate the interest rates and the number of years it will take for you to repay the loan.
Purpose of the Loan
How you plan to use the loan also affects your loan application. If you are a first-time home buyer, you are likely to get a lower interest rate than if you were to use the home loan for real estate purposes. In the event of an investment loan, banks and lenders consider the amount you’ll be possibly getting from your investment property, so you might get a higher interest rate.
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Property prices in Australia have been on a rollercoaster these past few years, with the housing market being reshaped by the pandemic and inflation. So, to be safe, banks often limit the amount on their investment loan rates in places where rental is not typical, compared to cities where rentals are soaring.
What Type Of Loan is Best For An Investment Property?
Regarding taking out an investment loan, there are two types of loans suitable for rental property investors: principal-and-interest loans and interest-only loans.
However, out of the two, the interest-only loan is a more suitable choice for investors as your obligation will be to cover the interest component of the loan. On the other hand, a principal-and-interest loan requires you to pay a portion of the principal in addition to the interest rate. Finally, investors can claim the debt as a tax deduction and further lower their expenses.
An important thing to note is that after a while, you’ll need to make principal repayments, regardless of the property type. With all that in mind, interest-only loans remain favoured among investors.
Cautions Regarding Applying for an Investment Property Loan
When applying for investment property loans, it’s important to be aware of a few things.
- Commission income – Receiving your salary as commission income can impact your ability to get an investment loan. Nevertheless, while most lenders accept commission income, it may not be accepted in its entirety, depending on how steady the income is. The best case scenario is that you have been receiving a stable and consistent income for at least 12 months.
- Credit history – Lenders are always interested in your credit history. When you apply for a loan, lenders always do a soft credit check, which usually doesn’t impact your credit history. Nevertheless, bank hopping until you get approved for a loan negatively impacts your credit score since multiple activities on your credit history are a big turn-off for many lending companies.
- Savings – Lenders want to know you are capable of paying off your debt before granting you an investment property loan. Usually, you will have to provide proof of possessing at least 5% of the purchase price. In addition, some lenders will accept rent history as a substitute for genuine savings. They often require the rent history for the last 12 months, though some will consider 3 months’ worth of rent.
- Mortgage brokers – When visiting mortgage brokers, potential investors will often receive free advice on the best loan options, depending on their finances. However, you should be wary of the fact that some brokers are paid in commission by investment property lenders if they successfully secure a loan.
They might point you in the wrong direction and advise you to get a loan that works for them but not for you. Therefore, always do individual research while keeping in mind the loan mortgage brokers offer you.
- Affording your payments – When applying for an investment property loan, you must consider all the payments you will be obliged to meet in the future. Maintenance and insurance fees are just some examples, but there could also be other expenses.
Remember that the investment property loan could last a few years. So be sure to know your limits before jumping into new debt.
Investment property loans pose a great risk for both lenders and borrowers. For this reason, lenders expect you to meet a series of conditions before providing resources. These include genuine savings, good credit history, stable income, and proof of equity in other properties. Before deciding, conduct research and consider getting help from a professional.
1.Do you need a 20% deposit for an investment property?
As a rule of thumb, most banks or lenders require a 20% deposit when buying an investment property. While smaller deposits are available to some investors, they imply stricter conditions.
2.How do you maximise the borrowing capacity for an investment property?
Your borrowing capacity is probably the most important thing when looking for an investment property. That being said, knowing your credit score, having proof of being debt-free, getting your finances in order, and saving money for a deposit, are a few things you could do to maximise your borrowing capacity.
3.How much equity is required for an investment property?
Potential buyers need to deposit 20%-25% of the total property value. In that case, lenders or banks require an LVR of 80–85 %. For a detailed answer, go back to our “How Much Can I Borrow for an Investment Property” comprehensive guide.