Investment property – how much can I borrow

How much can I borrow for an investment property

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Figuring out how much you can borrow to buy an investment property is the first step to becoming a property investor or adding to your existing portfolio.

To determine your investment property borrowing power, you will need to have a look at your financials, including:

  • Financial commitments
  • Assets
  • Income – including salary and potential income from rent
  • Debts (such as car loans, credit cards, existing mortgages)
  • Credit history
  • Savings

How much will the bank lend me?

The amount will vary depending on the type of investment. As a general rule, most institutions prefer lending not more than 80% of a residential property price or 70% of a commercial property. Some exceptions apply, and in some cases you could borrow up to 95% of a residential property’s value

Each lender will have its own metrics to assess individual cases, so it pays to shop around or use the services of a mortgage broker to compare what is on offer.

Generally speaking, borrowers could expect to get an investment property loan that is 3 or 4 times the amount of their total gross income, or a loan where the repayments are about 30% of their yearly income.

You can use the borrowing power calculator on our website to get a personalised estimate using your financial information.

How is my borrowing power calculated?

Lenders will assess how much you can put aside from your income for your investment property mortgage repayments.

This is calculated by looking at:

  • Yearly income: you will need to provide pay slips or your last 2-3 annual tax statements.
  • Expenses: including debts, medical expenses, and living expenses such as food, clothing, children’s schooling and so on.
  • Number of dependents
  • Amount of savings
  • Size of your deposit.

Apart from your yearly salary, other forms of income can also be taken into account to determine your borrowing power, including:

– Rental income: Most banks use only 80% of your rental income in their assessment
– Overtime, bonuses, commissions, allowances
– Trust distributions
– Dividends
– Self-employed income

Using another property as security

If you own another property, then you could use the equity in that property as a deposit for your next investment. Equity is calculated by taking the current market value of your property, minus the amount you owe. For example, if your home is valued at $600,000 and you still owe $200,000, you’ll have $400,000 worth of equity.

Self-Managed Super Fund

Self-Managed Super Fund

If you have a Self-Managed Super Fund, you could use it to invest directly in residential or commercial property using the funds you’ve accumulated in super.

Banks will generally allow SMSFs to borrow about 70-80 per cent of the property value.

Tax-deductible personal super contributions, salary sacrifice contributions, and compulsory super guarantee payments made into your SMSF, can all be used by your SMSF to help cover the loan repayments.

Factors that negatively impact your investment property borrowing power

Credit History

Every time you apply for a new loan a lender will do a credit check, which gets marked as an activity in your credit history. Even if you don’t have a bad credit history, some lenders will reject people with multiple ‘activities’ on their credit history. Keep this in mind as you consider applying for a new loan or credit card.

Some lenders will only consider your base salary and not commissions when calculating your borrowing power. This means that if you earn $100,000 a year, which is made up of a $50,000 base salary and $50,000 commission, only $50,000 will be taken into account when doing the calculations.

There are some lenders that will consider your take home earnings, so it pays to shop around if you are a commission earner.

Credit Cards
The greater your credit card limit, the lower your borrowing power. This applies even if the credit cards have no balance outstanding. If you have credit cards that you don’t use, you might want to consider closing them to increase your borrowing capacity.

How Much Can I Borrow Calculator
A good way to get an estimate of how much you could borrow for your investment property is to use an online calculator. This tool will analyse your financials and give you an indicative number based on the financial information you input.

It is important to note that online calculators provide an estimate based on certain assumptions. To get a definitive answer on your investment borrowing power based on your personal circumstances you should talk to a mortgage broker.

You can speak to a mortgage broker now, using Property Market Investor’s quick and easy to use tool.

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