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What newbies should know about financing investment properties versus homes - featured image
By Brett Warren

What newbies should know about financing investment properties versus homes

Think getting a loan for an investment property will be as easy as your home mortgage?

Well, think again.

Currently, lenders are more cautious.

Home LoanFollowing the fallout of the Haynes Royal Commission into banking they're making property investors jump through more hoops than ever to get an investment loan, yet they're keen to help first home buyers get into the market.

This is also in part due to the regulatory clampdown in investment and interest-only loans that started three years ago because of concerns by APRA, our financial regulators,  about property prices, particularly in Sydney where more than half of all loans at that time were being taken out by investors.

Unfortunately, these new measures were introduced nationwide which meant that investors across the country were caught up in the cross-hairs.

While it does seem like these restrictions are being loosened somewhat, generally speaking it is still more difficult for investors to secure finance than it is for home owners.

Some of the big differences between the two types of buyers are:

1. Bigger deposit

While some lenders are still willing to approve loan applications for home buyers with a deposit as little as 5 per cent, investors aren’t so lucky.

Today most investors will require a deposit of 20 per cent.

Of course, for long-term investors who have built up equity in their portfolio over the years, this is not difficult to achieve.

Alas, the same can’t be said for first-time investors, who may have to consider help from the bank of mum and dad or guarantor loans to get finance approved if they don’t have a big enough deposit.

2. Higher interest rate

Lenders have been ramping up interest rates on investment loans for a while now.

Interest Rate2Whereas, over the past few years, owner occupier and investment loans usually had similar interest rates, today there a differential of 0.25% to 0.5%.

While the difference might not look like much when written like that, in reality the difference could affect your cash flow.

3. Different loan products

The types of loan products differ for each buyer type these days, too.

Not that long ago both owner occupiers and investors could access interest-only loans, but they are in short supply for both at present.

This means that investors may have to accept principal and interest repayments on their loans, which may come with a slightly lower interest rate, however the total monthly payments may be higher.Home+loan+borrowers+should+budget+for+p&i+repayment

And remember...only the interest component of the P&I loan is tax deductible

A strategy to use to secure finance under the current regime, therefore, may to agree to principal and interest repayments and then refinance later down the track to a different lender.

More and more first-time buyers — young and old — are opting to buy an investment property rather than a home.

It can be a smart and lucrative move as it can get them on the property ladder in more affordable locations than where they’re currently renting.

Before they begin, though, they need to make sure they understand the differences between investment and owner-occupier loans so as to avoid unnecessary disappointment.

Successful property investment should be relatively emotion-free after all.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.
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