3 things you need to know when borrowing to invest in property
Borrowing to invest in property can be a viable way to expand your portfolio. But it’s important to stay up-to-date with the rules.
In mid-2015 the Australian Prudential Regulatory Authority (APRA), which regulates Australia’s banks, imposed caps on the level of investment lending. It came hot on the heels of previous APRA initiatives also designed to take the heat out of investment lending to support more sustainable property price growth.
These guidelines for investing will help you understand how APRA’s changes might affect you when you borrow to invest.
Lenders have tightened loan-to-valuation ratios for investors.
As a result of APRA’s initiatives, banks were left to make their own choices about how they would rein in investment loans. This has meant a variety of approaches have been taken by different lenders.
A common thread is that borrowing limits for investors have been tightened. As a property investor, you could face less generous ‘loan-to-valuation ratios’ (LVRs) than owner-occupiers.
The LVR is the percentage of a property’s value you can borrow. Following APRA’s changes, you may not be eligible for a loan even with a deposit of 5 to 10% of a property’s value.
You’ll need to get your finances in order.
Loan serviceability criteria may also have changed since you last looked at an investment loan. Rather than assuming you have enough funds to invest in a rental property, it is important to LoanCaddie to understand exactly what sort of deposit you need and how you can demonstrate your ability to make repayments ongoing.
Investing in property is a business decision and your bank will treat it like one. As an investor, it makes sense to go to your lender with all the groundwork complete and paperwork ready to go. Give yourself the best opportunity for approval by showing evidence of a healthy deposit and long-term savings history.
Consider making the most of your existing equity.
If this is not your first property purchase, you may have equity available to reinvest. Your history of repaying the existing loan – and the amount you’ve already paid down – could be the pathway to your next property, in lieu of a cash deposit.
Investing in property means keeping your finger on the pulse. APRA changes and decisions made by your bank could affect your portfolio. Staying across current lending criteria and guidelines will make it easier to act when you lay eyes on the ideal property.
LoanCaddie can explain how to expand your buying options or help you get your next investment finalised sooner.