Investment loans: How to put your best foot forward

Time and time again, property has proven itself to be a solid long term investment. With interest rates coming down and home values going up it’s no wonder so many Australians are planning to buy an investment property. So how do you give yourself the best chance of having your first investment home loan application approved?

Mortgage Choice broker Peter Niere says following a few simple steps can help ensure your investment loan application is successful.

Show you’re a safe credit risk

“The basics of any home loan application certainly apply to investment loans,” explains Niere. “You need to show your lender that you’re a good credit risk. This means making all your existing loan repayments on time, paying your bills on time and also meeting your credit card and other credit obligations on time, including repayments to furniture stores and the like.”

Niere says it pays to be extra diligent about meeting all credit repayments for at least six months before you apply for an investment loan. “Most lenders want to see between three and six months worth of credit conduct, so it’s worth being extra vigilant during this period, making sure nothing falls into arrears.

“You may also need evidence of a savings history, to illustrate that you can afford the cost of owning an investment property.”

Niere says lenders tend to be more conservative when calculating servicing capacity on investment loans. “Most lenders tend to incorporate a larger safety margin. Even though they will look at the expected monthly rent the investment property is likely to bring in, they also assume costs such as management fees, and factor these into their servicing calculations.”

Get organised

Getting all the right documentation together for an investment loan application can be time consuming. Niere advises starting early and keeping a file (electronic or hard copy) of the documents you need to submit. “This includes pay slips, up to six months’ worth of home and personal loan statements, credit card statements, and so on. If you’re self-employed you may also need to provide your tax returns for the last two years, as well as company accounts.

“Sometimes personal and car loan statements can take longer to obtain and that can be frustrating if you’ve found the perfect investment property and want your loan approved quickly so you can make an offer.”

Check your credit file

Well ahead of applying for an investment loan, Niere suggests obtaining a copy of your credit rating file, which is available from credit reporting bodies, such as www.veda.com.au. “I have seen clients locate a default on their credit report that is there in error. This kind of thing can be addressed, but it will take time, so make sure you access your credit rating six to 12 months in advance.”

If you have an imperfect credit history, you don’t need to abandon your investment property dreams, says Niere. “If you do have issues around your credit history, a mortgage broker may be able to point you towards a lender that is more flexible about who they will lend to.”

Be wary not to make too many credit enquiries. Some lenders may see you as a high risk borrower if you have too many enquiries logged on your credit file. Keep this in mind when applying for home loans, since every lender will request a credit file which is also logged. Too many enquiries can lower your credit score.

Using the equity in your home to apply for an investment loan

Many first time investors use the equity in their home as the deposit for an investment property. “Before you apply for an investment loan, it’s a good idea to obtain an accurate valuation of your home, so you know how much equity you’ve actually built up,” says Niere.

“Also make sure you ask your lender or broker about the ‘loan to value ratio’ [LVR] you may be able to borrow.

“Many lenders are pulling back slightly on the LVR for investment property loans, so you may only be able to borrow 95 per cent of the value, including lenders’ mortgage insurance [LMI], or 90 per cent, plus LMI.”

Buying an investment property when you’re a first time buyer

If an investment property will be your first property purchase, Niere says you will need to meet all the standard home loan application criteria, including having a steady income, being able to show a strong savings history and having a favourable credit rating.

In addition, he recommends seeking professional advice around how to structure your loan to maximise tax benefits down the track. “This is especially important if you are going to live in your first property for a while before letting it out as an investment,” he says.

Consider the type of property you want to buy

It can be difficult to have investment loan applications approved for certain types of property. “Whether you’re an investor or otherwise, you may struggle to have a loan approved for a studio apartment or for student accommodation,” says Niere. “Serviced apartments can also be difficult to get over the line.

“If you’re buying an apartment, its size will be important. If the property has over 50 square metres of living space, you’re fine. Only a few lenders will lend on properties that are between 40 and 50 square metres, and if the property is less than 40 square metres you can normally only borrow at 80 per cent LVR.”

Understanding what makes a favourable investment loan application could help you get the financing approved for your first property investment.