21 April 2016

How much can I borrow?

How much can I borrow?

If you have purchased property in the past, you are probably familiar with the way that banks and lenders will assess your borrowing capacity, which is the size of the loan they are willing to give you. An individual’s borrowing capacity is based on three main factors:

  1. their level of income,
  2. the deposit funds available, and
  3. how much other debt they currently have.

Income Level Required for Property Investing 

This part is fairly straight forward, with the lender requiring evidence of your annual income, most likely your last 2-3 payslips if you are not self-employed. To get an estimate of what your monthly repayments might be, you can use a mortgage calculator tool or consult a financial specialist. The benefit of buying an investment property, is that a lender may also take into consideration the expected rental return on the property, thus giving you a greater borrowing capacity.

Property Investment Deposit Required 

In most cases you will need a minimum of 10% of the property purchase price for an upfront deposit, in the form of cash or equity. So for an investment property of $600k, you will need to prove to the lender that you have $60k available to contribute.

While this amount is the recommended minimum, having a larger deposit will reduce the size of your loan, and give you access to a wider range of financial products, as some lenders will not lend out more than 80% of the property value. Presenting a deposit of 20% of the purchase price may also mean you avoid the Lenders Mortgage Insurance (LMI). If you already own a property, you may be able to use the equity you have acquired as the deposit for your investment property.

How Can Existing Debt Effect Property Investment? 

Finally, the lender will take into account any existing debt you may have. Mortgages on any other property you own, personal loans, car loans or credit cards will all affect your capacity to borrow more money.

Before applying for finance, it is recommended you create a comprehensive breakdown of all your outstanding debt, including the amount remaining, the current interest rate and the current monthly repayments. This will help your financial specialist or mortgage broker provide you with the best advice for your situation.

It’s always recommended investors speak with a licensed finance specialist or mortgage broker who has access to multiple finance avenues. Not all lenders will be equal in their treatment of an individual so working with someone who has access to multiple products is ideal.

At the end of the day, finance forms the foundation of any investment so it is important to get it right.  It should be viewed as an objective tool, loyalty to your current bank might not always produce the best investment loan. Finally, don’t focus solely on the interest rate, as the lowest interest rate does not always mean you will pay the lowest amount of interest if other set-up, exit or ongoing costs are charged.

This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.