Real estate is considered a great investment option because of the many benefits the market can yield. Given the current economic climate, real estate is seen as a secure investment that is less likely to be affected by market volatility and more likely to generate fixed returns. It can also be used as a rental property with the potential to generate a steady flow of passive income.
However, investing in real estate also requires heavy financing – and for investors who do not have a huge bankroll, taking an investment property loan may be the only way to seal the deal.
So, how much can a property investor borrow? The answer depends on several factors.
Are you eligible for a loan?
Before they can borrow, investors need to a qualify for a loan. Banks and other financial institutions conduct background checks to know if a person is in a stable financial position to make repayments. They use different criteria to determine an applicant’s borrowing capability.
Gainful employment is among these factors. Lenders typically check a person’s yearly income based on pay slips and their annual tax statements from the previous two or three years. Daily expenses, medical bills, debts, and mortgage repayments are also taken into consideration. The number of dependents can affect a person’s borrowing capacity as well.
Banks also want to know if an applicant has genuine savings, and to some extent, retirement savings. Additionally, they check if a person has resources allotted for the deposit that are separate from their genuine savings.
A good credit history can also help get an approval, as does having an above-average credit score.
How much are banks willing to lend?
Banks and other financial institutions often lend no more than 80% of the value of a residential property and up to 70% for a commercial property. But there are cases when lenders are willing to grant loans as much as 95% or even 100% of the property’s value.
For loans exceeding the standard 80% for residential and 70% for commercial, lender’s mortgage insurance (LMI) is often required. Our LMI estimator can help you calculate the amount you need to shell out for this one-time fee designed to protect lenders from financial loss.
The purpose of the loan and property prices are also among the factors affecting how much an investor can borrow.
Real estate investors applying for a home loan have a greater chance of being approved for a higher loan than applicants who plan to use the property as their first home as lenders often take into account the portion of rental income that the property will generate.
Property values tend to fluctuate. Because of this, banks often limit the loan amount for areas where real estate prices are low or rental activity is slow.
Can you afford an investment property?
This tool provides an estimate of how much a real estate will cost and calculates the amount of cash you will need on a monthly and annual basis to fund your investment property. The tool also indicates the amount of taxes you need to pay for owning an investment property. These two parameters are then combined to provide a measure of the after-tax profit or loss associated with owning a property.
Meanwhile, this calculator gives you an indication of how much you can afford to borrow based on your income and expenditure.
However, if you have plans on venturing into investment property, it’s still best to speak to a mortgage broker who can give you sound advice on how to proceed.
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