Becoming a property investor is as exciting as it is time-consuming. From determining long-term profitability to ongoing maintenance, there’s a lot to learn.
Securing the right financing is crucial to ensuring your investment is profitable and sustainable. In this property investment financing guide, we’ll explore your investment loan options, share insights into effective financial planning and reveal our top tips for getting the most competitive deal for your needs.
Buying your first investment property — your investment loan options
Investment loans are the most popular way to finance a property investment. While traditionally used for owner-occupied homes, many banks and lenders offer investment property loans tailored for rental properties. Like a standard mortgage, investment loans are available under a:
- Fixed interest rate — A fixed-rate loan “locks in” your interest rate for a set period (typically 1 to 5 years), giving you more stability in your repayments. It’s the ideal choice for investors who prefer having financial security with their repayments and don’t want to be affected by interest rate fluctuations.
- Variable interest rate — This type of interest rate changes over time, fluctuating in accordance with market conditions. Variable rates also offer greater repayment flexibility, including the option to make extra repayments and potentially reduce the loan term.
- Split interest rate — A split rate combines the security of a fixed rate and the flexibility of a variable interest rate. Under a split rate, borrowers often have the choice of what portion of the loan will be fixed and variable, giving them more control over how they manage their loan.
Before committing to an investment loan, it’s important to shop around and compare interest rates, fees and loan features to ensure you get the best deal. Home loan comparison websites can be helpful, but don’t hesitate to seek expert guidance from a mortgage broker.
Budgeting and financial planning for your investment property
Before applying for an investment loan, know where you stand with a solid budget and financial plan. Having this information will tell you how much you can afford to invest, what your repayments may look like and how much rental income or capital growth you can expect.
Here are three things to consider when building your financial plan:
- Calculate your borrowing capacity
Your borrowing capacity refers to how much a lender is willing to lend you based on your income, expenses and existing financial liabilities. Many banks and online tools offer borrowing power calculators that can provide an estimate. However, remember that these estimates are just a guide. Lenders will also view your credit score and debt-to-income ratio before approving a loan.
- Plan for additional costs
Don’t forget to budget for additional costs beyond the property price. These can include:
- Stamp duty
- Lender’s mortgage insurance (LMI)
- Legal and conveyancing fees
- Property management fees (if renting)
- Ongoing maintenance and repairs
Factoring in these costs will help you avoid surprises and ensure you won’t be spending beyond your means.
- Consider building an emergency fund
An emergency fund is a must when investing in property. Unexpected repairs, vacancies or interest rate hikes can all affect your cash flow. A buffer of 3-6 months’ worth of expenses can help you cover these costs without resorting to expensive short-term loans or dipping into your savings.
Our four top tips for securing a competitive investment loan
Given the financial demand of owning an investment property, finding ways to save can make a massive difference in your budget and overall experience. Here are a few ways you can work toward securing a low-cost, competitive investment loan:
- Improve your credit score — A higher credit score can help you qualify for lower rates and better loan terms. Before submitting your application, pay off any outstanding debts and make sure all your bills are paid on time.
- Negotiate loan terms — Don’t be afraid to negotiate with lenders. A slight reduction in interest rates or fees can lead to significant savings over the life of the loan.
- Look into getting pre-approved — Getting pre-approved for a loan can give you an advantage when negotiating with sellers. It shows them you are serious and financially ready to make a purchase.
- Consider expert guidance — Buying your first investment property can be incredibly stressful. Fortunately, there are many professionals who can guide you through the process, from mortgage brokers who help you find the most competitive loan to property investment agents who take the stress out of finding a profitable asset.
Cashflow Properties is your trusted Sydney property investment agent
Know your asset is in safe hands with Cashflow Properties. Our investment property services are based on our signature 6-step procedure. Our team of property investment agents manage all aspects of the property buying process, from leveraging our network of real estate agents to putting you in touch with an experienced conveyancer to get the deal over the line.
Explore our investment property services by getting in touch with us today for a free consultation.
