To be honest, the property investment mortgage market is tight right now. It’s not that there isn’t cash available for loans it is just that banks and other financial institutions are making homebuyers with AAA credit ratings jump through hoops to get financing for investment properties.
One of the keys to property investment right now is the ability to pay back the mortgage. That is why banks are requiring many people with excellent credit to prove they can make their monthly loan payments.
Keep in mind, that each bank or lender will have different rules and if you fail to get finance, you can try a different financier.
Some banks will pre-approve you based on your supplied documentation. This means that they will agree to lend you a certain amount, usually with conditions attached, before you start looking for a property.
It is a good idea to have this done if you do not have much experience buying property as pre approval will give you confidence when it comes time to make an offer.
Deposit and Savings Record
If you’ve never bought a property before, the bank will firstly want to see that you’ve got a pattern of savings which proves that you can set aside an amount each month in order to make the loan repayments.
A good deposit will also help. Normally the minimum deposit is around 5% to 10% of the property’s value, but in the past, lenders have gone as far requiring no deposit (eg. They provide 100% finance).
However, it is less risky to use a substantial cash deposit, or alternatively if you already have equity in another property, then to use that equity as the deposit. This is what is usually referred to as “no money down”.
Serviceability is a finance term which means the ability to service (repay) the loan.
Let’s say your loan repayments come to $2000 per month. If you are going to rent out the property, and the rent comes to $1400 per month, then the bank should take that into consideration. They will normally only take a portion of the rental income (eg. 75%) to account for management fees and vacancy periods.
They also look at the most common components of your debt load, your ability to pay back the investment loan from your monthly income. Today, most banks believe that you’re your ability to pay back should be between 28 and 31 percent of your monthly income. You figure that by taking your monthly income and then dividing it by (to keep the figures round) 30 percent. So, if your monthly income is $4,500 (before taxes) your monthly housing cost should be no more than $1,350.
That seems great, but then the banks start looking at your other debt payments, such as your credit card debt, your car payments, student loans and any other installment or credit commitments you may have.
The lender will also estimate your cost of living and add it to your other expenses. They will then calculate if you have enough money left over to repay the mortgage.
Some tips to help increase your chances of getting finance are:
- To pay your bills on time
- Pay down any bad debt (such as credit cards, car loans etc)
- Show a pattern of savings over at least 3 to 6 months
- Save up as much deposit as possible
- Have extra money available for mortgage expenses such as the application fee, Lenders Mortgage Insurance (if applicable) or Taxes (eg. Stamp Duty) if applicable
With all of these done, you will have a good chance of financing your first home or new investment property.