Good as Gucci: Why You Probably Can’t Afford Sydney and Melbourne’s Best Homes
October 4, 2023
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Investment Loans FAQs
Most frequent questions and answers
Loan-to-value ratio is the value of your property loan compared to the value of the property itself (as assessed by your lender). It’s expressed as a percentage and is often used during loan applications. The lower your LVR, the more likely you are to get financing.
For example, if your lender assessed an investment property as being worth $800,000, and you had a deposit of $150,000, you’d need to borrow $650,000 to purchase the property.
In this case, you could calculate your LVR by dividing $650,000 by $800,000, then multiplying the result (0.8125) by 100, which gives you 81.25%.
Generally, an LVR below 80% is desirable. If your LVR is over 80%, lenders view your risk as being higher, and you may be required to take out lenders mortgage insurance, and face higher interest rates and less favourable loan conditions.
A negatively geared asset has expenses (including interest expenses) that are greater than the income it produces. Negative gearing allows you to deduct the loss produced by the asset from other forms of income, which can help reduce your taxable income.
For example, if you had a mortgage on an investment property that costs you $600 a week to manage and maintain, but only produces $500 a week in income, that property would be negatively geared by $5,200 per year. You could then deduct $5,200 from your taxable income.
Negative gearing is generally most effective if you anticipate capital gains on your property when you sell. High appreciation (an increase in the asset’s value) can make the losses incurred through negative gearing worth it.
Yes, you can use the equity in an existing property (such as your residence) as a deposit on a second property, and use your existing property as security for the loan on your new property. This makes purchasing an investment property without cash relatively simple, especially if you’ve already accrued a reasonable amount of equity in your current property.
The easiest way to access the equity in your current property is through refinancing.
Lenders mortgage insurance (LMI) is insurance taken out by your lender to cover them if you are unable to pay back your loan. LMI is insurance for the lender, not you, but you’ll normally be charged a one-off LMI fee if your lender requires that LMI be taken out.
LMI is generally only required if there is a higher-than-usual risk of default. Typically, loans with an LVR above 80% will require LMI.
While refinancing an existing home loan to buy an investment property is a valid investment strategy, it isn’t always the right decision. Before refinancing, you should seek personalised financial advice from your mortgage broker.
If your mortgage broker advises that refinancing is a suitable approach for you, you’ll generally need at least 20% equity in your current home to use it as a deposit on a new property (unless you want to pay LMI).
Other considerations include:
Always talk to your broker or another qualified financial professional before making any decisions.
- Refinancing comes with its own costs. Make sure the potential benefits outweigh any expenses.
- Make sure you can actually afford to pay back two property loans. You need to calculate the costs associated with maintaining and managing an investment property, whether it’s negatively or positively geared, and whether you can get tenants.
- Unlocking equity is important. If possible, try to invest in properties that are likely to appreciate (go up in price) over time, as this will help you unlock more equity.
Always talk to your broker or another qualified financial professional before making any decisions.
