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During the loan application process, you need to put your best foot forward to prove to lenders that you’re creditworthy and reliable. But what do lenders look for when reviewing loan applications, and how can you make yours look better?
Below, we’ve outlined key factors lenders consider and what you can do to help your application get approved.
Eligibility requirements
First and foremost, you need to check if you meet the lender’s eligibility criteria. Most lenders typically require borrowers to be at least 18 years of age and be Australian citizens or permanent residents. In some cases, applicants married to an Australian citizen or permanent resident may be eligible as well.
In addition, lenders often have requirements regarding the type of property you're allowed to buy using the loan. Before proceeding with your application, confirm that the property you want is within the scope of the loan you’re applying for.
You could also ask the lender directly about their eligibility requirements for the borrower and property, as this may vary depending on the lender and the specific investment home loan.
Credit score
Your credit score is a key factor lenders use to assess your creditworthiness. This covers a person’s financial history, including existing debts, credit applications, and the timeliness of payments made to creditors or lenders. Generally, the higher the credit score, the more creditworthy you appear to the lender.
Lenders may also use your credit profile to determine your ability to afford the investment loan and make repayments on time.
A ‘good’ credit score varies depending on the credit reporting agency’s metric. You can request a credit report from agencies such as Equifax and Experian to see where your credit score stands.
A higher credit score may help you secure a better deal on your investment loan, meaning more competitive interest rates and flexible terms. This is because lenders typically see those with strong credit profiles as lower risk.
If your credit score is low, it may be worth pausing your investment loan application until it’s improved.
Loan-to-value ratio (LVR)
The loan-to-value ratio (LVR) is the amount you’re borrowing against the value of the property, shown as a percentage.
If the property is valued at $500,000 and you’re putting down a 20% deposit of $100,000, your investment property loan will have an LVR of 80% because you’re borrowing 80% of the property’s total value. A higher LVR means you’re borrowing a larger portion of the property’s value.
When you apply for an investment property loan, lenders look at the LVR to see if you’re eligible. Many lenders prefer an LVR of 80% (equivalent to 20% deposit), which could be tough for borrowers who want to purchase higher-priced properties. Other lenders accept higher LVRs, like loans.com.au, where you can borrow up to 90% LVR.
Generally, borrowing more than 80% LVR may be subject to additional costs and conditions such as lenders mortgage insurance (LMI).
Rental income shading
When applying for an investment home loan, lenders consider your rental income as part of your overall income. However, they typically only include 70% to 80% of the gross weekly rent in their loan serviceability calculations. This is known as ‘rental income shading’ and accounts for potential vacancies and expenses.
If the rental income is from a property that’s currently tenanted, lenders can usually verify the rental income through lease agreements. However, for projected rental income, you may need to provide a rental appraisal from a licensed property manager as well as additional documents.
Projected rental income is generally more scrutinised and may reduce borrowing capacity.
Serviceability buffer
Lenders assess your ability to repay a loan by applying a higher interest rate than what you actually will end up paying. This is called a serviceability buffer and is used to see if borrowers can handle payments if there are any future rate changes.
In Australia, lenders typically apply a buffer of at least 3% above the actual loan rate, in line with APRA (Australian Prudential Regulation Authority) guidance.
For example, if you’re applying for an investment home loan with a 6.34% interest rate, lenders with a 3% serviceability buffer will calculate your loan at a 9.34% interest rate to determine whether you can still make repayments.
While this can reduce your borrowing power, it helps ensure you can handle future rate increases.
For investment property loans, the serviceability buffer can be a bit more complicated as it accounts for your existing investments and loans.
Tips for your investment home loan application
Here are a few things that can help streamline your investment loan application process:
Understand your borrowing power
Lenders are going to assess your ability to repay the loan with a serviceability buffer that’s higher than the current rate, which means a lower borrowing capacity for you. Consider this when you’re deciding how much you want to borrow.
Improve your credit score
Take time to strengthen your credit score as this may help you secure a better rate and features when you apply for an investment home loan.
Have all your documents ready
Missing requirements delay most investment loan applications. For a speedy application, have all the documentation ready to submit.
Need help understanding investment home loans?
If you’d like to know more about investment home loans, get in touch with the friendly lending specialists at loans.com.au. They’d be more than happy to answer any queries and discuss your finance needs.
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek independent professional advice tailored to your personal circumstances before making any financial decisions.
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