By Adam Smith
If you're looking to build your investment property portfolio, you're most likely going to need a home loan. Unfortunately, it's a tougher time for property investors these days than it was in the past. Credit conditions have tightened as a result of the Australian Prudential Regulation Authority's (APRA) crackdown on investment loans.
The good news though is that there are still competitive investment property home loan deals available. And if you take a few steps and practice some financial discipline, you can put yourself in a great position to be approved.
1. Keep up with your bills
It's always wise to keep on top of your financial obligations, but it's particularly crucial when you're applying for an investment property home loan.
Investment property loans are seen as a riskier class of loans, and more prone to default. This means that lenders are looking for responsible borrowers to help mitigate that risk. If you've fallen behind on your bills or, in particular, you've racked up some defaults, writs or judgements, many lenders are likely to see you as too big a risk.
The move to positive credit reporting also means that some lenders have very robust data by which to assess your creditworthiness. Positive credit reporting is a new system in Australia that offers lenders information on your repayment history; not just repayments you've missed but ones you've made. While not all lenders have moved to this system, they are mandated to implement it by July of this year.
Keeping up with your bills now can boost your credit rating and make your application much more attractive to lenders.
2. Reduce your debt
When lenders assess your application, they'll be looking at your ability to service a home loan. In other words, they want to know that you'll be able to keep up with your repayments.
In assessing your serviceability, lenders will look at your income and your expenses, but they'll also look at your liabilities. This means any existing debt you have can shrink your borrowing capacity and potentially harm your application.
Before you apply, look for ways to reduce your debt. If you have personal loans or credit cards, try to pay them down. If you have multiple credit cards, think about consolidating them into one with a 0% interest balance transfer.
It's important to note that when lenders look at your credit card debt, they’re looking at the combined limit of all your credit cards rather than what you actually owe on them. For this reason it may be wise to reduce your credit card limits.
3. Build up a good deposit
The days of buying a home without a deposit are long gone. These days, lenders require at least a 5% deposit to approve a home loan and many lenders have stricter standards in place for investment property home loans.
In general, lenders like to see borrowers with a 20% deposit or more. If you have less than a 20% deposit, you'll end up paying for lenders mortgage insurance (LMI), which is an insurance policy that covers your lender in the event that you default on your home loan. The cost of LMI can run into the tens of thousands of dollars.
Saving more than a 20% deposit will not only help you avoid LMI, but will also make you more attractive to lenders.
4. Choose the right property
Lenders will also assess the property that you're looking to buy when they decide whether or not to approve your loan application. When a lender offers you a home loan, they take your property as security. This means that if you default on your home loan, the lender can sell the property to recoup their losses.
Because your investment property will serve as security for your home loan, your lender will want to ensure it's a property that is likely to have willing buyers should a forced sale occur. Because of this, lenders tend to frown upon apartments below 50 square metres, serviced apartments, apartments in areas of oversupply and other properties that they think could be difficult to sell.
the type of property you're buying can also help to boost your borrowing power. As a property investor, you'll have not only your personal income to back you up, but your rental income. Most lenders will accept a proportion of assumed rental income, usually up to 80%, when assessing your income and ability to repay.
If you're looking to buy an investment property, finding one with good rental returns can seriously bolster the amount that a lender will offer you.
5. Don't over-apply
Applying for an investment property home loan can be a stressful process. It can be tempting to want to cover your bases by applying with multiple lenders. Make sure you avoid this temptation.
Over-applying can have serious ramifications for your chances of approval. Any application will appear on your credit file, and multiple applications can damage your credit score.
Not only should you avoid over-applying for home loans, but you should also be wary of over-applying for credit in general. This means applications for new credit cards, personal loans and even things like mobile phones and rented consumer goods.
Every application is a red flag to a lender. In the months leading up to your investment property home loan application, keep a lid on your debt appetite to guard your credit file.