Hi there brokers, my cousin had recently decided to purchase two investments properties but both of the loans were declined for some reason.
A friend of mine who works in a bank mentioned something about investment loan being less preferred than investment loans but is this the case with all banks? If so, why would a bank do this when investment property clearly makes money from rental income?
FYI – I am also thinking of getting into investing myself.
Why don’t banks like giving out investment loans?
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- Otto Dargan
- Mortgage Specialist
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Re: Why don’t banks like giving out investment loans?
Hi and welcome to the forums timburtonfan,
Property investors tend to have above average incomes, are educated and have stronger asset positions and you would expect that property investors to be classed as low risk borrowers. Contrary to this belief investors are actually seen as higher risk borrowers by most lenders.
The reason behind this is most investors need a bigger loan to buy a property. Other reasons may include:
Otto
Property investors tend to have above average incomes, are educated and have stronger asset positions and you would expect that property investors to be classed as low risk borrowers. Contrary to this belief investors are actually seen as higher risk borrowers by most lenders.
The reason behind this is most investors need a bigger loan to buy a property. Other reasons may include:
- When an investor gets in financial trouble they tend to find ways to pay any loans secured on their home while letting other debts such investment loans go into arrears.
- Investors take risks and they may buy in unstable markets to seek a higher return. This can be a problem for lenders since they make money when borrowers make their repayments on time and not when the property goes up in value.
- Investment loans have interest only repayments and this can increase the cost of funds for the lenders which reduces their margin on your loan. If too much of their loan book has interest only repayments then they can be in trouble when they borrow on the money market. The government also requires that they set aside more capital.
- Many investors rely heavily on negative gearing to save on taxes and some lenders will take this into account when they assess your borrowing power. This is because you may have a cash flow problem as you only receive your negative gearing tax refund when you lodge your tax return and it may not be received each month unless you lodge a request to vary your PAYG tax withholdings which few investors do.
Otto
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Re: Why don’t banks like giving out investment loans?
That is a lot of reasons indeed! I’m still confused about negative gearing though can you tell me what this is and why is this important?
- Otto Dargan
- Mortgage Specialist
- Posts: 7730
- Joined: Sat Sep 06, 2008 5:55 pm
- Location: Sydney, Australia
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Re: Why don’t banks like giving out investment loans?
Hi timburtonfan,
Negative gearing is when you borrow to invest in a property and your interest and running costs add up to more than your investment income which causes you to make a loss. This allows you to claim the net loss as a tax deduction against your other income.
Let us suppose that you are earning $80,000 a year at your job and you make $20,000 a year in rent income. You spend about $30,000 in interest and running costs such as maintenance, repairs, etc. Therefore there is a loss of $10,000 incurred from your investment property every year.
This loss on your investment property means that your taxable income can be reduced by offsetting it with the loss amount and so your final taxable income will be $70,000 ($80,000 - $10,000).
If you fill in our free assessment form then we may be able to help you after knowing more about your situation. You may also call us directly on 1300 889 743.
Cheers,
Otto
Negative gearing is when you borrow to invest in a property and your interest and running costs add up to more than your investment income which causes you to make a loss. This allows you to claim the net loss as a tax deduction against your other income.
Let us suppose that you are earning $80,000 a year at your job and you make $20,000 a year in rent income. You spend about $30,000 in interest and running costs such as maintenance, repairs, etc. Therefore there is a loss of $10,000 incurred from your investment property every year.
This loss on your investment property means that your taxable income can be reduced by offsetting it with the loss amount and so your final taxable income will be $70,000 ($80,000 - $10,000).
If you fill in our free assessment form then we may be able to help you after knowing more about your situation. You may also call us directly on 1300 889 743.
Cheers,
Otto
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- Posts: 45
- Joined: Thu Jul 04, 2013 4:39 pm
Re: Why don’t banks like giving out investment loans?
Hmm..I understand the concept of gearing a bit better now. Thanks a lot for explaining this in such a simple way.
Re: Why don’t banks like giving out investment loans?
Hi there Otto, I am planning to borrow loan to buy an investment property but I don’t know the requirements. Would appreciate it if you could provide some information on this.
- Otto Dargan
- Mortgage Specialist
- Posts: 7730
- Joined: Sat Sep 06, 2008 5:55 pm
- Location: Sydney, Australia
- Contact:
Re: Why don’t banks like giving out investment loans?
Hi Victoria,
Applying for an investment loan is generally considered riskier than a standard home loan and because of this you first need to be in a strong financial position to qualify.
The basic lending criteria are:
Otto
Applying for an investment loan is generally considered riskier than a standard home loan and because of this you first need to be in a strong financial position to qualify.
The basic lending criteria are:
- You should have 5% to 10% in genuine savings.
- If you are borrowing more than 90% then some lenders like to see equity in other properties (if any).
- A good credit history.
- An above average credit score.
- Stable employment.
- It can be a standard unit, house, townhouse or land and construction.
- It can larger than 50m² living area.
- The property should be in a good condition.
- The property can be located in a high demand location (major city or town with more than 10,000 people).
Otto
Re: Why don’t banks like giving out investment loans?
The criteria sounds pretty simple, thanks again. I’ll post again if I have more trouble with this.