There are a couple of reasons why you might choose to purchase a property. However, unless you have enough money to buy the property outright, you’re going to want to take out a mortgage to finance your project. The process for applying for an affordable loan actually depends on your ultimate goal. By this, we mean that the process for applying for a regular home loan varies significantly from the process of getting an investment loan.
In this article, we will look at each option and determine the best way to go about your application.
Investment Loan vs Home Loan
As you might have gathered from the names, the main difference between owner-occupancy and investments is what you intend to do with the property. If you’re buying a home or apartment to live in it, then it’s called an owner-occupied property. However, if you buy a property with the intention to rent or flip it, then it’s considered an investment.
There are some important points to remember though. If you choose to live in a home for a while and then rent it out after moving somewhere else, either because your finances now permit you to, or you need to relocate for work, or if you initially rent out your property and plan to move in at a later date – these are still considered owner-occupied. The same thing applies if you buy a block of flats with four or fewer units, provided you actually live in one of those units.
Why Is This Important?
At this point, you’re probably wondering why the above information is important and how it may impact your home loan. Well, when applying for a mortgage, you need to specify whether you need an owner-occupier loan or an investor loan. This will most likely change the rate at which you’re charged interest, whether you opt for an offset mortgage, variable rates, fixed home loan or construction financing.
Investment loans are typically the more expensive of the two, both in terms of interest rates and additional closing costs, such as the appraisal fee. For example, a variable interest home loan for an owner-occupier might be available at 3.39 percent interest. For investment mortgages, the interest rate for a comparable loan might be 3.79 percent. If you’re looking for the cheapest investment home loan, look for lenders that don’t charge high closing fees and ongoing fees, such as loans.com.au. Make sure to check the specifications
Furthermore, you might need to put forward a larger down payment for an investment home loan, meaning your maximum loan-to-value ratio (LVR) will be higher. In Australia, many major banks and other lenders have recently lowered the maximum LVR and raised interest rates for investor home loans in response to concerns that the lending rate for this type of mortgage is growing too quickly.
How to Get a Home Loan for an Investment Property
For investor home loans, the requirements can be a little stricter than when applying for a regular home mortgage, especially now that the bar has been raised by the banks and other lenders on their criteria for non-owner-occupied properties. You’ll need to demonstrate that you have a certain amount of money set aside to manage the mortgage. If you already have an investment loan, the required value of the funds set aside might be higher than if it’s your first home loan. This will typically be evaluated in terms of a certain number of months of mortgage repayments for each property.
The amount you’ll likely receive in rental income can also be a consideration for investment loans since you might be able to cover the cost of your mortgage repayments and other expenses with this income. That means the investment might not actually lower your debt-to-income ratio (the percentage of your monthly income that’s put towards repaying your mortgage), which is one of the factors in the loan approval process.
Mortgage lenders also take into consideration the potential appreciation of your property over the course of the home loan. Both you and they may want to review information about vacancy rates for the area or property as well as trends in housing prices. These factors will come into play when you have your property valued.
Other Points to Consider
It’s very important not to misrepresent your intentions for a property when applying for a home loan. Because of the differences in rates, it might be tempting to try to obtain an owner-occupier mortgage no matter what, but loan agents are trained to evaluate whether their borrowers are attempting occupancy fraud. That’s because the differences in rates come down to the amount of risk that tends to accompany each type of home loan. With investment properties, there tends to be a greater chance of default, and therefore more exposure.
There are better ways to ensure you’re obtaining the best possible rates for your mortgage if you’re purchasing an investment property. Even though most of Australia’s banks and lenders have been tightening up their requirements for investment loans, with Grange Finance’s help, you can take measures to increase your borrowing capacity and apply for the correct type of funding to support your property ambitions. Contact their trained advisors today.