The sustained period of low interest rates has got many people wondering whether it’s time to buy an investment property.
But how do you do that if you’re already paying off one mortgage?
It is important not to base your decision on interest rates alone. Variable rates are just that: variable. If your objective is to produce rental income and capital growth, your investment needs to allow you to achieve this. It must be the right decision for you in the long run.
How can I borrow against my current mortgage?
Unfortunately, not everyone is lucky enough to have a bank account full of instantly accessible cash. However, it is possible to borrow against your current mortgage to fund a new investment.
If you have lender’s mortgage insurance (LMI), the bank will allow you to borrow up to 95% of the entire value of your property. Without it, you can borrow up to 80%. This applies to the property you currently own. It is possible to use this borrowed money to fund the deposit for your next investment property.
Once you’ve decided on a second property, you can borrow 80% (without LMI) against this property as well. The idea is that you then use your salary and rental income from your investment to pay off your loans.
Before all this is possible you will be required, at the very least, to provide proof of current income and predicted rental return to your bank or lender.
For serious investors, using a mortgage broker to apply for an investment loan once you are ready to start looking for a property is one of the first steps in the buying process, their knowledge of different lenders and their lending criteria can help you to find the loan best suited to you. If you are unsure of any aspect of the finance process, your mortgage broker is always available to aid you from the pre-approval stage to settlement.
Other things to consider when purchasing an investment property
This might sound fairly straightforward, but there are many other things that need to be taken into account when deciding whether or not to purchase a property.
Does the property need renovations? Will you need to use a property manager? Will you be paying hefty strata fees? Is it close to schools, shops and transport? All of these things will affect your yield over the long term, and property investment is a long-term commitment.
There is no substitute for homework, so before making a decision to purchase an investment property, ensure you have done all necessary research and are confident with the decision you are making.