5 min read | 14 May 2021
You have a few dollars stashed in savings and are keen to see if you can take out a home loan to pay for an investment property. But you’ve got questions. Like ‘Can I afford an investment property?’ While you might be concerned about added expenses, repayments or feeling trapped by your mortgage, understanding the amount you can comfortably borrow and potential repayments are the first steps in the journey.
To plan your investment with caution, from the get-go it’s important to consider your current financials and what happens after you buy.
The logical starting point is figuring out your borrowing power. When lenders determine what you could borrow, they consider the usual suspects like your earnings, what you have in savings, and how your credit history is tracking.
If you already own a property, they look at your equity too – i.e. what your property is worth minus anything owing on it. The more equity you have, the greater your borrowing power.
Try our calculator for borrowing power:
You can see what you could borrow, what your repayments could be and – this is the PLUS bit – the indicative costs that may come up based on your location and situation (that’s if you’ve decided on a suburb or town to buy in).
Just like buying property for the first time, you need money for a deposit and to cover purchase fees like stamp duty and property registration. Plus there are the other bills to pay, like your legal people, the property inspection costs, and your accountants’ advice.
Your savings, available cash and any equity you may have in a current property are what you need at this point to cover you. Allow for a buffer.
Before a lender says yes to your application, one of the things they need to see is that you’re in stable regular employment and have been for some time (around the two-year mark). So in the time just before you take on a new home loan, don’t go making big moves in your work life. The aim is to keep your earnings steady so you don’t experience any dips in cash flow.
The bank says they’ll offer you X amount, so you take X, right? Not necessarily. You don’t want a mortgage that leaves you feeling trapped. You want to feel in control.
In practical terms, think big picture and start a spreadsheet or list. Get the bills out and the bank statements. Run a highlighter over the must-pays and day-to-days. Take note of your incidental spend. Your holidays. Can these things change? Can you? Think as much as you can through before landing on the amount you feel comfortable with taking on.
Your future self will thank you if you do these four things up front. Don’t wait till you have the loan and your tenants have moved in.
Look at how much money you can afford to contribute towards repayments. While your property could have rent coming in, which will cover some of the repayment amount, you need to make up the difference. Broadly speaking, try not to park half your income or more on your mortgage. Keep it well below.
Investment properties, like any property, come with maintenance and other costs. You can easily plan for some, like strata if you purchase an apartment or council rates if you buy a house. Other costs that require a little more research include damage by tenants, general wear and tear, and even the strata going up. A good real estate agent could help you with some ballparks. Your trusty accountant as well.
Property prices can fluctuate over time and you can lose money during the life of your investment, be that through lost rent, property damage or falling house prices. So it’s about adding a buffer to your calculations and keeping in mind that it’s a long game. Ten years or more is the rule of thumb for holding onto a property investment.
Investing for many is best scoped with the aid of an adviser before you jump in. They can help you figure out your investment purpose and how to best make the most of it, tax wise. Long term capital gains? Steady cash flow with a rental that you can positively gear? Get an expert opinion on the best way forward for you.
Lots to think about, so just take your time. And remember this last affordability factor – finding a home loan for your investment property that doesn’t sting on the fees and rates.
Remember, you can always speak to one our friendly local Aussie home loan experts about our home loans and if it works with your investment plans.