“How much can I borrow for an investment property?” and “How much is the minimum deposit lenders accept?” are the two most commonly asked questions from newbie property investors (and even investors looking to add another property to their portfolio).
The answer to those two questions will vary, depending on your financial situation and other factors. This article will explain those factors and hopefully, help you determine how much you can borrow- without overstretching your financial capacity.
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How Much Are Banks Willing to Lend For An Investment Property?
Banks and other lending institutions prefer lending no more than 80 per cent of the residential property’s price. For commercial properties, most banks are happy to lend about 70% of the purchase price. In some cases though, banks are willing to lend as much as 95% of the property’s value.
Loans where you borrow more than the standard 80% (residential) or 70% (commercial) require you to pay a fee called “lender’s mortgage insurance”. This is a one time fee which goes towards the lender to cover them in case you don’t make your repayments. Our property calculators page has a link to a site that helps you calculate the estimated lender’s mortgage insurance you will be required to pay on your loan. This can either be paid up front, or can sometimes be added to your loan.
The next question then is, “what do I need to do to qualify for a loan worth 80% of the property’s price?” Better yet, “How do you qualify for a 95% loan on an investment property?”
Factors that Banks and Lenders Use to Assess Your Loan Application and Borrowing Capacity
Each lending company will have its own set of metrics or qualifications to use for assessing loan applicants. One bank may approve an applicant for a loan worth 80% of the property’s price, but another bank may approve the same person for a higher loan, say 90% of the property’s price, a third lender may reject you altogether.
There’s no absolute rule or formula that can tell you how much you will be approved for, but most lending companies assess applicants using these factors:
Applicant’s borrowing capability– This is the company’s estimate of how much you can afford to set aside for loan repayments. Your borrowing capacity is affected by the following:
- Yearly income (based of pay slips, or more often you last 2-3 annual tax statements)
- Expenses- living expenses, debts, medical expenses, mortage expenses, etc
- Number of dependants you have (sorry but kids can lower your borrowing capacity)
- The amount of your ‘proven savings’, and to some extent, your savings for retirement
- The size of your deposit, different from proven savings
All of your incoming and outgoing money are then compared against the type of loan you’re applying for (fixed rate or adjustable rate mortgage?), interest rates, repayment type for the loan (will you pay interest only OR interest and principal?), and number of years loan will be paid.
Purpose of the loan- Real estate investors who wish to apply for a home loan are more likely to be approved for a higher loan, compared to other applicants in the same earning bracket who plan use the property as their first home (owner-occupiers). This is because in many cases banks will also take into account a portion of the rental income that the property generates (sometimes up to 80% of the rental income).
Property prices- Real estate prices are not stagnant; the value of a property may fluctuate or increase. Hence, banks may limit the amount they are willing to lend for areas where property values are low or for areas that don’t see much action in terms of rentals. It’s best to consult a mortgage broker before applying for a loan in a remote area.
Remote areas are seen to be more risky as property prices are prone to greater fluctuations. I have seen many lenders who will not lend past the 80% for towns that have under 10,000 residents. This is not a hard and fast rule but it does seem common against many lenders.
In general, loan applicants could be approved for a loan about 3 or 4 times the amount of their total gross income, or a loan where the repayments are equal to about 30% of your yearly income. Don’t assume you’ll be approved for such amount though, talk to a lender first about your options. They can help you get an idea on how much you need to save and how much you can borrow. Most importantly, they can help you get the best deal for your budget.
Items To Be Cautious Of When Applying For An Investment Property Loan
Credit History – Apply for a lot of loans is not a bad thing, but chances are each lender will do a credit check on you every single time you apply for a loan. This credit check gets marked as an activity (neutral activity) on your credit history. Some lenders will automatically reject people who have had multiple activities on their credit history, even if none of them are bad. So just be careful when applying for loans.
Commission as income – Many lenders will ONLY consider your base wage and will not take into account any commissions you earn in your job (despite how regular they are). So you may be earning over $100,000/year but they only judge you on your $50,000/year base wage. However, there are some lenders out there who will look at your actual earnings, so seek them out if you are having these difficulties.
Mortgage Brokers – Mortgage brokers offer a free service to help you find a suitable loan. Be aware that mortgage brokers are paid by the lenders for securing the loan, and some lenders pay more in commissions than others. Consider their advice but always do your individual research – because the mortgage broker may be pointing you towards a loan that is better for them but not necessarily better for you.
Proven Savings – Many lenders will look for ‘proven savings’. This is money that you have saved up yourself and not money that you have received as a gift or a loan from family members or friends. Many lenders consider money ‘proven savings’ once it has been in your account for 3 months – so effectively you could get a gift…let it sit in your account for 3 months and PRESTO! However, all lenders use different methods so check with your mortgage broker.
Affording Your Repayments – Your loan repayments will not be the only repayments you have to make on a property. There are other costs like maintenance, insurance, managements fees, council rates etc. So make sure you factor all these in before making a decision about whether you can afford a loan or not.
Credit Cards – The greater your available credit card limits (even if they are empty) the lower you borrowing power may be. I have heard that lenders will take away $4,000-$5,000 in borrowing capacity for every $1,000 credit card limit you have. I have even heard some lenders limiting you by as much as $20,000 for every $1,000 credit card limit you have. So if you have excess credit cards you may need to look at lowering your limits on them.
How Much Can I Borrow Calculator
There are many websites out there to help you estimate how much you can borrow. Remember these are a web based application, usually based on just one lender, and won’t always give accurate advice (I have found them to be fairly conservative). It might be a better idea to speak to a mortgage broker as they can look into the lending criteria of multiple lenders for you.
However, if you want to use an online calculator I recommend this one because they don’t ask you for your personal details and then call you trying to sell you a home loan.