How to Finance Your First Investment Property

How to Finance Your First Investment Property

Ever dream of becoming a real estate mogul and starting your own empire?

There are more and more people leaning towards investment property. In fact, the global real estate market reached a value of US$6.83 billion in 2021, and it is projected to grow in value by another billion dollars for the next six years.

Getting started

Buying an investment property is a lucrative way to amass wealth, but it also entails big work.

If you’re a homeowner, you have already gone through the ups and downs of securing a property. And financing it is probably where you got stuck the longest among the many, many steps in this long process.

Now, you finally decided that you want to invest in your first investment property, but where should you start? Whether you’re buying a single property or investing in a rental portfolio, read on to get insights into how you can finance your first investment property.

What’s the difference between investment home loans and owner-occupied home loans?

The process of getting a home loan for your investment property is similar to getting a home loan for a property you own and occupy.

However, there are key differences to remember.

  • Stamp duty and interest rates are higher for investors than for owner-occupiers. But investors can write off the cost and interest charged on their loan as tax deductible on the condition that they do not occupy the property.
  • First time investors are ineligible to receive government incentives for first home buyers.
  • Investors earn side-income from property rental.

Below are ways you can finance your first investment property:

Secure your deposit

Just like getting a traditional home loan, you need to first get approved for an investment loan by securing a deposit. A 20% deposit of the property’s price makes you eligible for most investment home loans faster as it lowers your risk as a borrower from a lender’s perspective.

If you’re not able to comply with this, you can opt to bite the bullet and fork out for Lender’s Mortgage Insurance to secure a home loan with less than a 20% deposit.

LMI is an insurance policy that reimburses a lender if you fail to make repayments and your home is repossessed and sold for less than its outstanding mortgage debt. It usually costs between $3,000 and $13,000, depending on the size of the home loan and how much of your deposit you’ve saved.

Read: What Do I Need to Know About Lenders Mortgage Insurance?

Tap into your house equity

If you already own your home, chances are you have built substantial equity in it. You can access your part of your equity, or all of it, to finance your new property.

To figure out how much equity you have, just subtract your current mortgage balance from the total value of the property. So, if your property is worth $500,000 and your home loan balance is $200,000, you have $300,000 worth of equity.

Just remember that you will have to make extra loan repayments or increase your repayments as using equity increases the principal you will repay on your house.

Read: New Vs Old Investment Properties

Also read: How Can I Use My Property Debt to Build Wealth

Use a guarantor

If you have little to no deposit ready, have someone (usually a family member) to act as your guarantor. They will use a portion of their own home equity to help you secure your home loan. This is considered a fast and easy way to speed up the process of owning a property.

Read: Four Ways to Dive Into the Property Market With a Smaller Deposit

Ask help from your parents

You can take the step of asking help from family further by obtaining a cash gift deposit from your parents to purchase your investment property. If this is not feasible, you can ask for a cash loan instead — but this won’t be viewed by your lender as a form of “genuine savings.”

Read: How Can Your Parents Help Secure Your First Home Loan

Let the professionals do the work for you

Any kind of significant financial investment should only be made after seriously considering your personal financial situation.

If you’re interested in obtaining an investment property loan and you’re not quite sure where to begin, start by giving me a call on 0421 934 033.

Book an appointment