Determining your borrowing capacity

The first step to successful property investment is to understand your financial position and borrowing capacity.

Investors need to have a clear understanding of what their goals are before investing in the property market if they are to maximise their chances of success.

This will include determining if the goal is capital gains or generating cash flow, if it is a long term or short term strategy, and what kind of financing is required.

One of the biggest attractions of investing in property is the ability to borrow money to fund your purchase.

Know Your Numbers

Even in the most affordable markets, property prices generally run in to hundreds of thousands of dollars – and for that reason purchasing property outright would be out of the question for most of us.

But because property is widely regarded as a stable investment, it is generally possible to borrow up to 90 per cent of the purchase price – or in some cases more. For those with equity in their home or another investment property you can effectively borrow the full purchase price plus costs.

Making any investment requires diligence but when you’re taking on debt, to help maximise your returns it is fundamental that you understand your true borrowing and repayment capabilities.

So just what are your financing options when it comes to buying investment property?

The first consideration should be to speak to us. As a Mortgage Manager we can discuss your objectives and financial circumstances to help you select your loan.

We are well placed to help you through the loan selection and application process.

Financing your investment

When it comes to financing an investment property, it is essential that you talk to an accountant or financial adviser about the most tax effective way to borrow. However, there are a number of areas you should start thinking about.

If you’re an existing home owner you may well have a head start when it comes to entering the investment market. If your home has appreciated in value since it was first purchased there’s a chance that you’ll be able to tap into some of that equity to put down as a deposit on an investment.

Tapping into equity essentially means borrowing against the increased value of your home. This enables you to access the equity that has built up in your property over time without having to sell.

But what if you’re looking to make your first foray in to the market? There’s a lot to be said for making your first purchase an investment and it’s a step that many take.

One of the biggest hurdles to overcome when planning an investment property as your first purchase is funding the deposit.

If you’re relying on your savings to get you that first step on the property ladder, the good news is that you may be able to borrow up to 90 per cent of the value of a property thanks to Lenders Mortgage Insurance (or LMI).

LMI is a onetime premium that protects lenders against a loss should a borrower default on their loan.

If the security property is required to be sold because of a default, the net proceeds of the sale may not always cover the full balance outstanding on the loan. Should this be the case, LMI enables the lender to make an insurance claim for the reimbursement of any shortfall.

The cost of LMI is dependent on the size and percentage of the loan however it is likely to be thousands rather than hundreds of dollars. The cost of LMI can sometimes be included into the amount borrowed, reducing the upfront costs for the borrower.

This is called capitalising the LMI premium. First time buyers have other options as well as LMI to consider. It is also possible to use a guarantor to help pave the way to a first purchase. A guarantor essentially shoulders some of the responsibility of borrowing money – if you can’t make your loan repayments the guarantor agrees to meet your obligations.

This may require the guarantor to provide a mortgage on their own property as security for the loan obligations that they guarantee.

A guarantee may be accepted to support a loan for first time buyers that have sufficient income to service a loan but don’t have a deposit.

In some instances, the existence of a guarantor can mean that the cost of LMI is avoided, but it is essential that both the borrower and the guarantor are aware of their responsibilities before making any commitment.

Time to get realistic

So, there are options for both existing home owners and first time buyers when it comes to raising a deposit for an investment property, but how should you assess your borrowing capability?

As an investor, in most instances you’ll have rental income from your property to help you meet your mortgage repayments – and this may be taken into consideration when it comes to determining your borrowing capacity.

What will ultimately determine how much you should borrow is what you can afford to repay every month on your mortgage – and this is a key factor when it comes to the assessment of your financial position.

In addition to finding out how much you qualify to borrow, think about what you would personally be happy to spend on a mortgage every month. While it is good to know what your maximum borrowing capacity is, this figure may well be higher than an amount that you’re comfortable committing to.

The first place to start is to assess how much disposable income you have available each month as there may be a shortfall between the net rent generated by your investment and the amount you need to repay to your mortgage.

You should then discuss your situation with us, your Mortgage Manager, and we can take this into account when determining your borrowing plans.

Based on your lifestyle choices and expenses, the sacrifices you are prepared to make, plus your overall objectives, we will be able to help you decide how much you can afford to borrow.

With the right strategy, sound advice, a solid lending financial partner and finance in place, investing in bricks and mortar can be achievable.