While real estate remains the top choice for low-risk investment in Australia, it isn’t always a sure-shot way to get positive returns. You make one wrong move, and you lose out on making thousands of dollars. One way of hedging against the uncertainty of positive returns is taking out a mortgage. There are many benefits of purchasing an investment property through a home loan depending on your situation:
- Contribute less:You are usually required to contribute only 20% of the property price for the deposit – sometimes less. The home loan will cover the rest.
- Neutral Gearing:You can use your rental income to make the repayments for the home loan. If your rental income is equal to your property expenses, you own the house, and the mortgage is under your name, but it’s like someone else is making your repayments for you.
- Positive Gearing:If your rental income exceeds the expenses of owning your property, you’re free to keep what’s left after paying your mortgage and other costs. This way, you will earn your 20% deposit back sooner than if you had made 100% of the investment on your own, giving you positive returns sooner.
- Negative Gearing: In this case, your rental income does not suffice to pay your mortgage and other expenses of owning your property; however, when this happens, the Australian Government allows you to deduct the shortfall from your taxable income. Now that you know the benefits of purchasing an investment property through a home loan, the next step is to learn how to become a successful property investor through this route.
- You pay stamp duty only on the land; no need to pay it on the house being built.
- Interest payments made for the loan during construction are tax deductible.
- Depreciation of internal fixtures and fittings (such as the kitchen sink) is tax deductible.
- Found the best lenders for her to choose from, based on her needs and their lending policies.
- Filled out all the paperwork on her behalf.
- Convinced the lender to amend the existing loan application every time she changed the loan purpose and type, instead of requiring a new loan submission, saving time.
- Submitted an accountant’s letter to the lender to confirm that her new company did not hold any liabilities and had not participated in trading yet, making her Pay-As-You-Go income acceptable for servicing her loan.
- Processed the land and construction loans under a single application to further speed up the process and comply with the lender’s policy.
- Submitted a statutory declaration alongside the loan application to resolve the client’s legal name discrepancy.
- Attached closure letters for two of Mary’s credit cards to prove she intended to lower her expenses.
- Gave Mary frequent updates on any developments in the loan process.
- 20% deposit of the purchase price (usually)
- Lender’s Mortgage Insurance (if applicable)
- Loan application fee
- Stamp duty, mortgage registration and transfer fees
- Legal and conveyancing costs
- Building, pest and strata inspection fees
- Loan repayments and interest charges
- Repairs and maintenance costs
- Property management fees
- Borrow up to 105% of the property value with a guarantor (your guarantor’s property must be in Australia).
- Borrow up to 100% using the equity in another property.
- Borrow up to 95% with the First Home Loan Deposit Scheme (FHLDS) or other government schemes.
- Borrow up to 95% with a gift deposit.
- Borrow up to 95% with a personal loan as a deposit (low-risk borrowers only)
- If you qualify for one of the above schemes, you will be saving thousands of dollars on your deposit and LMI.
- Found the best lenders to choose from, one that would allow his parents to be guarantors and use their home as security on Evan’s loan, even though they already had a mortgage on the property.
- Filled out all the paperwork on his behalf.
- Got his guarantor a second mortgage consent that allowed him to use it as security for his investment property loan. Getting the consent was not easy, as the existing lender required their solicitor and the previous broker of the security to get involved in the loan variation. Because our broker had his dedicated loan processing specialist handle the situation on his behalf, co-ordinating with all parties went smoothly.
- Evan had to reduce his loan amount from $541,500 to $468,000, as he found a cheaper property after getting his approval in principle. Our broker sent a letter explaining the variation to the lender, to get the loan formally approved.
- As the client did not want to pay the deposit from his pocket, he took the risk of not signing the Contract of Sale beforehand. So, our broker’s team sped up the process to get his loan to formal approval and settle it.
- Gave Evan frequent updates on any developments in the loan process.
- Get a lower interest rate
- Get more flexible repayment terms
- Reduce the monthly repayment amount
- Qualify for cashback offers and rebates
- Am I making decisions logically instead of emotionally?
- What properties are on sale in the suburbs where I’m searching?
- Will these suburbs have capital growth potential now or soon?
- Are there any proposed developments nearby that could affect prices?
- Does the property need renovation? If so, do I have the extra funds for it?
- What are the average rental returns and vacancy rates in the area?
- Are there local amenities, such as schools, shops and transport nearby?
- Have I thought about who will manage the property?
- Allow you to set a much higher rent
- Help sell the property at a higher price Click here to learn how one of our clients got a home loan to upgrade a property and add value to it.
- Advertising costs
- Property management fees
- Borrowing expenses, including loan interest charges
- Council rates, land tax and strata fees
- Building depreciation
- Repairs and maintenance
- Cleaning and gardening costs
- Building and landlord insurance
- Accounting and bookkeeping fees
- We have a panel of 50-plus lenders to choose from for your investment loan.
- All our brokers are experts in the mortgage industry who have impressive career histories. Some of our brokers are property investors themselves.
- We allocate a team of loan processing specialists, credit analysts and customer service representatives to each of our brokers, to help process your loan quickly and efficiently
- We have a customer relationship team to handle your queries and to help you until your loan term is over. Our entire team is there to ensure your investment loan is working for you, even after settlement.
- Our website answers your investment queries with hundreds of articles relevant to home loans.
17 Tips For Buying Investment Property
1. Get A Construction Loan
Building your investment property, instead of buying an existing one, can often save you money, depending on the cost of materials and labour. In addition to a potentially lower price tag for the property, taxes levied are generally lower as well. Some of the tax benefits of purchasing an investment property through a construction loan include the following:Construction Loan for Investment Property – Client Story
Mary, Victoria
Goal
To get an investment loan for construction purposes.
Background
Mary, a 48-year-old divorcee, wanted to start investing in property. Her stable job of 10 years and good credit history made her a low-risk borrower. She also had saved up enough of a deposit for the loan amount she had in mind. So when she came to Home Loan Experts for our service, we were able to get her a quick pre-approval. Unlike many of our clients, Mary’s problems started mid-application, and came one after the other. First, after the pre-approval, she started having second thoughts about the type of investment loan she wanted. She had first applied for a land and construction loan, but mid-application, she wanted us to convert the loan for an established house instead. She then wanted us to rework the application for a second time to switch back to a land and construction loan. After that, Mary signed the Contract of Sale under her new company’s name, making her mortgage a trust deal, something she had not told us about beforehand.Solution
Here’s everything our brokers did to get Mary’s pre-approved investment loan to settlement:2. Set A Budget You Can Afford
It is usually best to put yourself in a strong financial position, with cash on hand for a deposit, before pursuing an investment loanIt would be best if you prioritised any other financial goals you might have before jumping in for an investment loan, as you may be entering a loan term of 25 or 30 years, depending on the size of the deposit you’ve saved. Here’s a snapshot of the upfront and ongoing costs you may encounter:3. Invest With Less From Your Own Pocket
Getting an investment property loan is already a sweet deal. But what if you don’t want to spend the standard 20% deposit and still want to avoid paying Lenders Mortgage Insurance? There are plenty of options available to borrow above 80% LVR without paying LMI.Guarantor Loan For Investment Property – Client Story
Evan, NSW
Goal
To purchase an investment property through a guarantor loan.