Getting a Home Loan in Australia if you're living overs...
29 Nov 2023
A well-chosen property investment is a proven way to increase your wealth over time so it is no surprise that many Australians have a passion for investing in bricks-and-mortar.
About a third of housing finance in Australia is for investors and, unlike most other countries, the typical Aussie property investor isn’t a millionaire planning to kick-back and live off rental earnings. Instead, they are a middle-aged salary earner or a small business owner hoping to make a capital gain and build up their retirement nest egg.
Our residential property investment market is dominated by landlords who have bought their own home and then taken the next step to buy a single investment property. If you have owned your home for a while then you too may be looking at using the equity in your home and buying a second property as an investment.
Here are some of the key questions you may want to ask before taking the plunge and buying an investment property.
This seems like a straightforward question. The first time you bought it was easy – “I want a home to call my own”. When buying a second home, you will need to think a bit harder about exactly what your strategy is. Are you investing for the long term or the short term? Are you looking to renovate the property and “flip” it, do you want to make a running profit from the rent, or do you plan to buy and hold for a decade or more until values rise? This will affect the type of property you buy.
The deposit required when buying your second property is the same as that required for your first home. Most lenders require at least a 10% deposit. To avoid costly Lenders Mortgage Insurance (LMI) you will need 20% deposit. The good news is that if you have owned your home for a while, you may not have to go through years of scrimping and saving to get the deposit. Instead, you may be able to leverage your equity in your home as a deposit. So what is equity in a home? To work out how much home equity you have, you will need to estimate your home’s value and then subtract the outstanding mortgage value. The difference is your equity.
The answer is “it can be”! It can also be a poor investment that you will regret. It depends on the performance of the property you buy and whether you buy at a good price in the first place. It will also depend upon whether you buy with the right financial structure because this can greatly affect the tax treatment of your investment. This is why it is very important to get financial advice from an accountant before investing in a second property.
Before you start looking for an investment property, it’s a good idea to make sure you can get a loan to finance your purchase. Otherwise, you are wasting your time. At the very least, punch your financial details into a home loan calculator and see how much you could theoretically borrow. You may be surprised that it is more or less than you thought. You may also need to refinance to buy an investment property.
When looking at investment properties, many people do calculations based on what their expected mortgage repayments will be at current interest rates versus the expected rental income. This understates the true cost because owning a property comes with a lot of expenses. These include council rates, insurances, maintenance, strata levy and property management fees.
This is a big one. It is crucial that you talk to an accountant before you buy a property because if you buy with a less than ideal structure, there is usually no way to fix it afterwards. Key issues include how you split your debt between your properties and how you divide ownership of the property between yourself and your spouse or another family member. At loans.com.au we frequently receive loan inquiries from people who are about to sign on the dotted line for an investment property who have not obtained independent advice. Don’t make this mistake!
This is a very important question. The first rule is to pick an area where you would want to live, that enjoys access to good infrastructure like public transport and shops. The second thing is to avoid locations that are overly dependent on one industry. As at October 2018, home prices in many once-booming mining towns were still well below their levels of a decade earlier! The key to avoiding these kinds of losses is investing in locations with diverse, multifaceted economies.
Many new investors have heard that houses make a better investment because the land component of property increases in value, while the building depreciates over time. While it is true that the land increases in value, it is really the location and scarcity that matters, so more land in a cheaper area isn’t necessarily better. One obvious advantage to an apartment is simply that an apartment doesn’t usually cost as much as a free standing house in the same suburb, so you are more likely to be able to afford it!
There are many different types of loan which suit different people. These include loans with variable or fixed interest rates and principal-and-interest or interest-only repayments. You will also need to consider whether you want to use an Offset to reduce your interest payments and whether get a package with your existing home loan. To find the best type of loan for your needs, speak to one of our friendly Lending Specialists.
Ultimately, a home is worth whatever the highest bidder is willing to pay and this will vary on the day. However, there are still some rules of thumb that you can use. You can get a fairly good estimate of how much a home will sell for by looking at the per-square-metre sale price of nearby homes. Simply take the sale prices of 10 nearby properties and divide by the square metres of land. This will give you a price per square metre for the immediate area. Then multiply this rate by the land area of a property you are considering. You can order a free property report from loans.com.au to get a list of recent sales in the area.
This is easy if the property is currently rented, just find out what it is rented for. If you are considering buying an owner occupied home and renting it out, you can ask a local real estate agent (not the one selling the home), what they think it would rent for.
Assess the property and work out if there is any scope for you to add a bedroom or build a minor dwelling that could increase your rental income.
To work out your expenses in owning the property, you will need to decide if you want to manage it yourself or hire a professional property manager. As a general rule, you can expect to pay a commission of between 7% and 10% of your weekly rent plus GST.
Some major works can be a positive like improved public transport or shopping, but some can detract from the value of properties in a suburb such as a garbage tip or major entertainment venue.
Look at approved development applications to see if the area is about to be flooded with new rental options that will compete with yours. By contrast, scarcity will lead to higher prices.
Answer these questions and you will be well on your way to making a successful property investment. If you want to find out how much you can borrow, just make an appointment to speak with one of our friendly Lending Specialists.
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.