The rules of property investment have changed! Here are 10 things you need to know if investing in property today.
1. You need more of a deposit to buy an investment property
Property investment in Australia is at an all time high. Both the regulator and the RBA have expressed concerns by asking the banks to slow this down.
The banks are now asking for larger deposits for those buying an investment property. Before a 5% deposit was acceptable. Now some lenders are asking for as much as a 20% or even a 30% deposit.
You should still be able to find some lenders, that allow you to borrow with a 10% deposit. But this is under constant review by the banks and may change at any time.
2. You need more of a deposit for interest only loans
The banking regulator is trying to limit the number of interest only loans people are taking out. Especially if they are borrowing more than 80% of the value of the property.
Most lenders now need at least a 20% deposit for interest only loans for property investors.
Property investors with a 10% deposit and making P&I loan repayments are ok for now. But if there is no slowdown in property investing, this too will also come under review.
3. You will be paying a higher rate for investment loans
Not long ago, investors and owner occupiers used to have the same interest rate.
Last year the difference used to be between 0.10% to 0.30%.
The difference between an owner-occupied P&I home loan and investor interest only loan could be as much as 0.50%- 1.00%.
That 0.50% – 1% difference on a loan balance of $500,000 could be adding as much as $2,500 – $5,000 your annual interest charges.
Shop around, you can still get some good deals for investors.
4. Get the right loan structure in place
Setting up your loans correct and having the right loan products is more important than ever.
Having all your loans and property with the same bank could be a disadvantage. Especially if that lender decides to no longer lend money to property investors. Or place tighter restrictions on what you can and can’t do.
Beware going direct to your bank and how they structure your loans. They only have access to one set of credit policy and a limited product range. Ensure they set the right structure for you and not the bank that they work for!
To continue to grow your property portfolio you will need to adapt with these and future changes. You may need to use non-bank lenders that are flexible and open to property investors.
5. Lenders appetite for investment loans will change
Expect banks to pull out of the investment property space from time to time. This will be because they have hit their quota for new investor loans. Banks will return once things have settled down and able to lend again.
Some of the big 4 banks have been ultra-aggressive and targeting investors. To withdrawing and placing restrictions on investor loans over the past 6 – 12 months.
Lenders that are slowing down will increase interest rates for new business. As well as reducing how much you can borrow.
This is where a mortgage broker can be of great advantage. They will let you know which lenders are open for business. As well as which banks have good deals for investors at time of application.
6. Your borrowing capacity has reduced
Over the past 6 – 12 months I have noticed a decline in clients borrowing capacity. Lenders have done this behind the scenes with changes to their borrowing calculators.
Investors are now looking to buying properties interstate due to their reduced budget. Interstate properties compared to Sydney are more affordable and providing better rental returns.
7. Be aware of depreciation and tax deductibility changes
There were some changes in the recent Budget for property investors. Depreciation and the tax deductibility changes are some of the expenses you need to be aware of.
You can only claim depreciation on plant and equipment on new property. Otherwise if you buy an existing property you must have bought those items to claim a deduction.
Travel expenses when visiting your investment property are no longer a tax deduction.
8. Don’t buy a property for negative gearing
No one should invest in property for the tax benefits only.
There were no changes to negative gearing or capital gains in this year’s budget. But speculation and future changes are likely.
When buying a property, ensure you have enough cash flow to cover the loan repayments. If you are waiting for a tax refund at the end of the financial year to help cover your mortgage you’re in trouble.
Some lenders are excluding negative gearing when calculating how much you can borrow.
9. Get yourself a pre-approval asap
The quicker you get you application in, the less likely credit policy changes will impact you. This allows you to focus on finding property rather than organising your finances.
The caveat is that once your pre-approval expires you will be subject to new credit policy. If these new changes end up impacting you, you will need to submit a new application. This applies to whether you stay with the same bank or go to a new one altogether.
10. Shop around or use a Mortgage Broker
In my 10 plus years as a mortgage broker I have never seen it so competitive and with constant changes. Both in interest rates and credit policy.
I have had clients that have been with the same bank for 10 years and we have had to look elsewhere for the next loan. This is because that bank that they have been with has changed credit policy and will not lend to them anymore.
Lenders are also taking advantage of the crackdown on property investors. If you think your banks interest rate is too high, shop around. You could be saving thousands. Better the savings in your pocket rather, rather than the being the banks profit.
Get in touch.
Theo Angelopoulos is mortgage broker with over 15 years of banking and finance experience. Theo is the Director and Founder of The Loans Analyst. A boutique mortgage broking advice firm based in the Sydney CBD that helps clients to buy property, provide strategic loan structuring advice and helping get a great deal on their home loan.