With the property market cooling, you might be thinking about buying property – either to live in or as an investment. Or perhaps you’re exploring rentvesting as a way to get a foot on the property ladder.
If you’re looking at property as a way to invest, you’ll need to understand how investment property loans work and how they’re different to a mortgage on a home that you live in.
Your interest rate could be higher.
When you apply for a home loan for an investment property, you could be looking at paying interest at a higher rate than you would on an owner-occupied loan.
This is because lenders generally see investment properties as riskier than owner-occupied homes. If there are changes in the rental market, it can have an impact on your income from your investment property and your ability to keep up with repayments.
Your borrowing capacity could be different.
When you apply for an owner-occupied home loan, lenders look at your financial situation – income, savings, expenses and more – to determine how much you can afford to borrow. They’ll also be looking at the loan to value ratio (LVR) of the property you’re looking to buy. This is ratio that represents the difference between the amount you’re borrowing and the value of the property. If the LVR is high – say you’re borrowing 90% of the total value of the property – your lender may ask you to pay for Lenders’ Mortgage Insurance (LMI).
When you’re organising a loan for an investment property, lenders will also be looking at your overall financial position. But they’ll be taking into account the rental income you’re expecting from the property as well as costs for maintenance, agent’s fees, landlord’s insurance and any other expenses.
To determine how much you can borrow for an investment property, lenders may also require a lower LVR on your loan. That means you may need a larger deposit to put towards buying an investment property.
What if things change?
If you have an owner-occupied home loan and decide to move out and rent your property, you’ll need to talk to your lender about this. They may want you to refinance with an investment property loan and pay a higher rate of interest on your loan. And if you’re doing the opposite – moving into your investment property and making it your home – you should let your lender know, and they may be able to arrange a home loan for you with a lower interest rate.