6 Lending Criteria for a Home Loan
Applying for an investment loan isn’t, and more importantly shouldn’t be, as emotional as the application for a loan when you are looking at buying your own home. However even though the emotion has been taken out of the equation you still need to make sure your application will be successful and that you are a good investment loan candidate because the sooner you get approval the sooner you can buy and the sooner you can become a successful property investor.
Unfortunately when it comes to investment loans different lenders will assess your application differently and underestimating these differences and is not planning for them can knock you out just when you had your eyes on the prize. Following are six areas where investment loan lenders can differ significantly on their lending criteria so you can plan for the potential blows:
- Your stress rate. When you are assessed as a loan candidate lenders look at how you will be able to service your loan at the current rate, as well as taking into account a stress rate to see how repayments would fit within your budget if interest rates were to rise. Is this stress rate, sometimes also known as an assessment rate, which can differ significantly between investment lenders and may be anywhere from 1 to 2% more than the current rate so while one lender may think you can afford your loan if rates rise 1%, another lender may think your loan is out of your reach if rates rise by 2%.
- The stress rate on your other property debts. In assessing your other expenses if you have a mortgage on your own home or other investment properties, some lenders will apply the same stress rate or assessment rate from above to those loans as well to see how your budget would handle it. Other lenders may only test your budget on your other debts using the current interest-rate.
- The proportion of rental income. The rental income you will receive from your investment property is taken into account when lenders consider your ability to repay the loan, however, it is the proportion of rental income which can vary between lenders.
- The benefits of negative gearing. Negatively gearing your investment property is a very tax effective option and can mean you pay less tax and therefore have a higher income however not all investment loan lenders will take into account the tax benefits during your application.
- Lenders mortgage insurance loan to value ratio. In most cases you will be charged lenders mortgage insurance if you have a loan to value ratio greater than 80% however some investment lenders will use a ratio of 85% before charging lenders mortgage insurance.
- The structure of your loan. If your investment loan is going to be structured as a company or trust you may have a shorter list of lenders willing to approve a loan to a company or trust as opposed to an individual.
The Remaining Steps To A Successful Investment
Once you know what to look for any application process you don’t want to be tripped up at other stages of the investment process so here are the stages you can expect to follow to take your dream of a property portfolio to a reality.
Step one
Making a visit to your accountant before you seek preapproval for your investment loan can help you decide on the best way to set up your investment loan, how to reap the most benefits and tax time and whether you want to negatively gear your property. Now is also the time to look at your budget to make sure that you feel you can afford an investment loan, before you let your lender make that decision for you.
Step two
Before you start searching for a property you will need to seek preapproval, but now you know how to get through that. It is important to make sure you have preapproval before you start your property search because you can waste a lot of time looking at properties you can’t afford, and if you see a property which would make the perfect investment you don’t want to miss out because you are hesitant about your finances.
Step three
Looking for a good value investment property is an important hurdle to clear because some areas of the Australian property market can still be overinflated and if you were to buy an overvalued property as an investment you could see what is supposed to be an appreciating asset actually decreasing in the first few years. To avoid being caught out take the time to research property values in the areas you are looking to invest, research in recent sales and reading up on appraisals. At the same time you do not want to bag a bargain which is going to cost you more in the long run because a ‘renovator’s delight’ is rarely delightful for an investor who is losing money every day the property is being renovated rather than rented out.
Step four
Never get emotional about your investment property search because you are not looking for a home for you, you are instead looking for a property which will appeal to good tenants who will pay their rent on time and look after your property as though it were their own. Therefore make a list of the features and fixtures you need to attract the rental return you have budgeted for, and keep your loan budget in mind as you put in offers on a range of different properties because in this way you are less tempted to go over your budget to secure a property you have become personally attached to, and if you continue to put in offers at or under your investment budget in due time you are going to find a vendor willing to sell at your price.
For more information about how to guarantee approval on your investment loan, and how to successfully build your investment portfolio contact Home Loan Finder now.
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