For many, getting into property investment is a long-term goal and often a step in the direction of a more financially secure future, or even retirement. Whether you are financing your first investment property or multiple investment properties, deciding on the right investment property finance strategy can impact the success of your investment.
It’s important to explore your options and ensure you choose the right investment property financing strategy for you.
The most common way to finance an investment property is through loans. Loans can come in various forms and have different requirements which will be unique to the individual applying. Below we explore the most commonly used loans to finance an investment property.
Our most common form of loan is often a conventional bank loan, or otherwise known as a mortgage. A conventional bank loan will take into account your earnings and outgoings to determine how much you can borrow towards your mortgage. This is coupled with a minimum deposit or downpayment, which is a lump sum of funds that must be provided by the borrower to secure the loan. Most lenders will require a deposit of around 20% of the property’s value however, in the circumstance of a strong financial situation, a minimum deposit can sometimes be as low as 5%.
Conventional bank loans can be secured through a number of avenues:
Direct to bank
For some, approaching their current bank who they hold everyday accounts with may be the first step to financing your first investment property. Your bank will have transparency over your spending and saving habits and your earnings and outgoings. They may also be required to substantiate any other personal debts they may have such as hecs repayments, credit cards or other personal loans.This information is then used to provide an estimate of what your bank is able to loan you. The benefit of going directly to your bank, is that they already have transparency over your financial situation, however, one of the downsides is they are limited to their policies, rates and regulations, so may not be the best rate in the market for you.
Through a broker or advisor
Another option that is often utilised when exploring investment property financing is through a mortgage broker or financial advisor. A mortgage broker is a property financing advisor that can help to find the right financing option for you, based on your individual circumstances. The benefit of using a mortgage broker or financial advisor is they work for you and in your best interests and are often not aligned to any one bank. This allows the brokers to explore several different financing options through a range of banks and lenders to ensure the right financing option for you. Brokers are also often used for more complex borrowing situations, for example using a guarantor or private money loan, or if there are multiple parties involved in the purchase.
Private Money Loan
A private money loan is a monetary loan from a friend, relative or other interested party. While not as common as a bank loan, some investors may be in the position to receive a loan from someone who has the means to. Each private loan will need to be discussed between the relevant parties and terms of the loan and repayment agreed to. It is always recommended to seek professional legal advice throughout this process.
In some cases, the loan may not require repayment and may be treated as a ‘gift’ from the lender. In this situation, some banks may require a statutory declaration to prove the money is a gift and won’t need to be repaid by the borrower.
When it comes to financing multiple investment properties, another common method outside of loans is to use equity accumulated from property assets.
Property equity is a long-term financing strategy and is built through the increase in a property’s value over time. Whether you are a first time investor or looking to finance multiple investment properties, equity can be utilised in a number of ways, from your own equity to other people’s!
Saving for a deposit can be one of the biggest hurdles in financing your first investment property and can take several years. However, using a guarantor can result in a much lower deposit required, or in some cases, not require a deposit at all. While there are great benefits in using a guarantor, these equally come with a large amount of risk for the guarantor.
The process of using a guarantor involves someone (usually a close family member or relative) offering to place their home equity against your loan. In this situation, no money needs to be exchanged from either party, but the lendor will secure a portion of, or the entire value of the deposit against the equity of their property. The key benefit here is that it means the borrower can have a much lower starting deposit, however the key risk is if the borrower can’t make a repayment, the guarantor will be held liable to do so.
Another key benefit of using a guarantor is you may be able to avoid paying lenders mortgage insurance (LMI). Lenders may charge LMI if you have a low deposit which can be an expensive exercise. By using a guarantor to help towards a deposit, there’s less likelihood of being charged LMI.
Depending on the individual situation, using a guarantor can result in a much smaller cash deposit or no deposit at all, however it’s important to understand and discuss the risks involved for the guarantor before committing to this financial arrangement.
Another way to use equity to raise finance for investment property is utilising your current property portfolio, if you have one. If you have held ownership of one or several properties for a period of time, it’s likely these assets have built long-term capital growth. Capital growth generates positive equity across property investments and enables investors to borrow against their initial investment property, or utilise that equity to purchase another. Equity can also be utilised to access better mortgage rates in future.
If you’re ready to start down the investment property path, or are a seasoned investor, researching the right investment property finance strategy could save you thousands in the long-term.
Always speak to your qualified financial advisor for tailored advice for you.
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