What you need to know when applying for an investment loan

Applying for finance as a first-time investor can be a complicated process that features several subtle differences from obtaining a loan for a property intended to be lived in.

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Banks treat investor loans differently to finance for owner occupiers, but if borrowers are well-informed, they can take steps towards investment success. Photo: Shutterstock (Image source: Shutterstock.com)

Applying for finance as a first-time investor can be a complicated process that features several subtle differences from obtaining a loan for a property intended to be lived in.

But if investors have a solid understanding of what lenders are looking for, the process can be as smooth as applying for owner-occupier finance.

Specialist Mortgage director of finance Helen Avis told Australian Property Investor Magazine that there were several crucial pieces of information a first-time investor needed to know before making an application.

“They need to know the full financial process - their borrowing capacity, how much cash is required to settle and their loan options, whether they lock in a variable or a fixed rate loan, and the fees associated with the finance," Ms Avis said.

“They should be made aware of the timeline for the financing process and should have a pre-approval in place before making offers on a property.

“And they will need to appoint a conveyancer to assist with the legal aspect of buying a property.”

The biggest factor that the banks are looking for, Ms Avis said, was that there will be sufficient income - earned and rental - to support loan payments after deducting liabilities and expenses.

Other differences between owner-occupier and investment loans include the maximum loan-to-value ratio that banks are willing to lend on, as well as higher interest rates for investors as compared to borrowers who intend to live in the property.

Rebecca Jarrett-Dalton, founder of Sydney-based mortgage broker Two Red Shoes, said many investors were also not aware of the subtle differences between lenders.

“We sit in a really privileged position where we can overlook all of the lender policies and there are so many different nuances in policies coming into play at the moment, so it’s actually really challenging for somebody to get it right by walking in the door of their local bank branch,” Ms Jarrett-Dalton told API Magazine.

Ms Jarrett-Dalton said lenders would differ on the maximum debt-to-income ratio they allow, while there were several things a prospective borrower could do to ensure that ratio does not hold them back from achieving their goals.

“All of the standard stuff applies - getting your house in order, not spending all your money on Uber Eats, expanding your income as much as possible, reining in any unnecessary liabilities or expenses all helps you,” Ms Jarrett-Dalton said.

“For a first time investor, a crucial factor is knowing what you want to get out of it. 

“Even as foolish as it sounds, you need to know your exit strategy before you begin and decide which type of property.”

Ms Jarrett-Dalton said understanding the drivers behind investing and what an investor’s future goals are was crucial in the decision-making process around what to buy.

“Every property is the right property for the right person. It’s not that there are wrong properties, but it might cost you more to hold a particular property as an investment,” she said.

“If you bought in Sydney at the moment, it’s going to cost you a lot more to hold the property because rents are so far behind property prices. 

“But if you bought in a more regional area, you will get a greater rent return against your dollar spend. 

“Neither of them are the wrong property, they’re just for the right purchaser.”

And Ms Jarrett-Dalton said buying a property that’s heavily negatively-geared for tax deduction purposes may seem like a sound strategy, but it could also put a handbrake on potentially building a portfolio.

“If your goal is to buy 10, just to pluck a number out of the air, and your first one is so heavily negative, that’s going to really hold you back. 

“We are seeing a lot of popularity in regional dual-occupancy properties - houses with granny flats, or a duplex on a property, if you bought that one first, that’s probably going to help you moving forward.”

Ms Dalton also shared her top tips on what lenders may consider when assessing an investment loan application:

  • Rental income
  • Running costs
  • Your debt-to-income ratio
  • Have your documents in order
  • Understand your goals and find the right property

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