Investment property loan

[Mrs Potts]

We are considering the purchase of an investment property perhaps within the next 6 months.

What I need is some information on how investment property loans work. I understand that often with investments you are able to borrow 100% of the property price. Are investment loans basically the same as loans for owner-occupiers (with regard to interest rates, fees, etc)? Are the repayments usually the normal principal and interest type? Or are there variations?

Obviously the idea is generally to have the rental income cover the loan repayments, but I worry that with property prices what they are that the rent required to cover these repayments would be unrealistic. Meaning we would have to be able to afford to make up the loan difference, as well as servicing our own mortgage.

We are likely to be coming into a reasonable sum of money within the same time frame. Would it make more sense to use some of that money to aid in the purchase of a property, or invest it wisely instead, while borrowing 100% for the rental property?

If it makes a difference to the answers, we currently have approx $280k mortgage on our own home, with the property worth roughly $100k more than that.

Thanks in advance!

[andie_pandie]

Thanks for you post Mrs Potts

In regards to a Investment, if you are going to use your current home as security and your have enough equity in the home you can borrow both the full price of the home and also costs to purchase the home.

If your home is worth $380K and say you purchase a investment for (rough price) $280K, both the values of the properties are added together giving us a total of $660,000.

Now to work out the borrowing amount you add the current debt of $280K to purchase price of new purchase $280K plus (rough amount) $10K for costs and this then gives us a total of $580K.

Then you divide 580/660 and this gives the bank what they call a LVR (Lending to Valuation Ratio) of 87.87%. Anything that is over 80% you will need to pay mortgage insurance on.

You can also borrow 100% if you want to go to another bank and not use your current home (this depends on location of the property) as security. The downside of this is the mortgage insurance premium will be a lot higher doing this, hence it is always a good idea if you have some equity in your current property to use this instead. If you do receive your lump sum you may choose to put down a 20% deposit so that you will not have to pay mortgage insurance.

I do urge that you contact a accountant or financial planner with regards to purchasing a investment property so that you can be advised of the tax implications and make sure that you have set up your investment loan correctly to maximise your benefits. Also with the lump sum coming in soon they will be able to give you the best options with regards to this cash.

Generally speaking if you do have additional cash coming in soon, you could look at reducing your current home loan if it is variable so that you still have access the funds if you require them later. If you do make a principal reduction and you have a fixed loan you may not have access to that money later. Also you will need to check that the bank that you have the current loan is happy for you to do a principal reduction in the first place.

Once again generally speaking with regards to setting up your home loan, a lot of investors choose to go on interest only for up to 5yrs, hence concentrate on reducing there current home loan first. In regards to rates, with most banks there is no difference between Investment or Owner Occuppied rates, there are however lots of different products available and some taylored more so for investment.

It does look like you have quite a few options open to you, if you want to discuss your situation further with me PM me and I can help you a little more with real examples.

Thanks again for your post.


Regards Andrea

[Mrs Potts]

Thanks so much for your reply, it's very helpful. I might be in touch with more questions!

[andie_pandie]

Thanks for the reply, more than happy to help whenever you need me.

Regards Andrea