First Investment Loan vs First Home Loan vs Refinancing Home Loan
How does getting a loan for your first investment property differ from your first home or refinancing your existing home
Many of our clients who purchased their first home a few years ago are now looking at buying their first investment property. One of the most common questions they ask is: what’s the difference between financing for my first home vs my first investment property?
In this post, I will explain the difference between the loans, factors affecting loan assessments for investment properties and a brief step by step guide in getting your first investment loan.
Understanding the difference and how banks treat each type of loan can help you decide which is the best type of loan to apply for when purchasing your first investment property.
Types of loans
- An owner-occupier or home loan (including first home loan) is used to finance a property that the owner will move into and live in.
- An investment property loan is used to finance the purchase of a property that will be rented out to generate income.
- Refinancing a home loan means increasing the amount borrowed on an existing home loan or changing the conditions on the loan – this often means finding a new loan product, sometimes even with a different lender.
Factors Affecting Loan Assessments for Investment properties v.s First Home and Refinancing
Interest Rates and Fees
With all other things being equal, your interest rate and fees are likely to be higher on investment loans, compared to owner-occupier loans, though experienced mortgage brokers have been able to achieve owner-occupied interest rates for property investors. This is not available through all lenders and industry knowledge is crucial. If you’re a first home buyer, however, you may be offered a special introductory rate or discount on fees so that the bank can win your business.
Regulation and Trends
Banking regulation affects how your loan will be assessed by lenders. For instance, right now the banking regulatory body, APRA, has cracked down on investment loans due to concerns that lending for investment is too high.
As a result of this, banks are now more limited in how much they can lend to property investors as well as how much they can discount interest rates on investment loans, compared to owner-occupier loans.
Deposits and Loan Amounts
The deposit amount required by you is also higher for investment loans because of the action taken by APRA. Related to this, the amount you can borrow is also likely to be less on investment loans because of the lower loan-to-value ratio (LVR) that is enforced on the banks when assessing investment loans.
For example, if you are looking at an investment property worth $1 million, a bank is likely to have a policy where they will only lend you 80% of the value of the property i.e. $800,000. Therefore you would need to have a deposit of $200,000 before you could go ahead with the property purchase, compared to needing only $100,000 if a 90% LVR applied. However, we have still managed to successfully secure 90% and even 95% investment loan amounts for some of our clients.
Banks look at a range of factors when assessing how much to lend to you, the deposit you need and your loan conditions (to learn more about this, see our blogpost 5 Key Steps To Getting Your Loan Approved… FAST which goes into this in detail). Understanding these factors can help you overcome any interest rate and borrowing amount disadvantages if you are a property investor. Alternatively, if you’re buying your own home, it’s also worthwhile ensuring no other factors are working against you getting the very best deal on your mortgage.
Types of Income
For investment loans, lenders will factor in rental income to assess your loan amount. Some lenders may even apply negative gearing to boost your borrowing power, which can mean the difference between securing or missing out on a good investment opportunity.
Benefits of investment property loans vs home loans
Increased borrowing power
Whilst the recent government changes have not been favourable to property investors, one benefit that investors always have over owner-occupiers is the ability to generate income from their investment property.
Lenders will factor this into their calculation of a person’s borrowing power, meaning that even if an investor is subject to a lower LVR, the fact they can earn more income means they might still be able to borrow more compared to if they had bought the property as their own home.
Investors can generally deduct interest on investment loans. Buying a property as an investment can also have other tax benefits like being able to claim renovations and depreciation. As mentioned above, some lenders will even factor in tax deductions or negative gearing into their calculation of a person’s borrowing power, which can further increase how much a property investor can borrow.
Applying for an investment loan is ‘good debt’ that is helping you build wealth for your future, through capital growth and rental yield on your investment property. Carefully structuring an investment loan can also allow you to reduce your ‘bad debt’ such as credit cards and car loans, and replace them with ‘good debt’.
Getting the right loan for your first investment property
Getting the right loan structure is the key to any loan, whether it’s a home loan or investment loan, but it is even more important with property investment as there are a range of other things to think about such as tax benefits and wealth creation. Your loan structure and the type of loan you apply for can affect things such as:
- how much you can borrow;
- how much deposit you need to save; and
- your interest rate, as well as other loan conditions.
Here’s a simple step by step guide to buying your first investment property:
Step 1: Loan Strategy
Take advantage of Mortgage Corp Free Loan Strategy Session to determine the best loan products to apply for – this could involve a combination of refinancing your existing home loan and applying for a new investment loan, and also considering whether there’s any opportunity to reduce bad debts such as credit cards.
Step 2: Budget Planning
Use our Budget Planner to get an idea of your current annual income and spending, and identify opportunities to adjust spending if required.
Step 3: Estimate your Mortgage Repayments
Use our all in one mortgage calculator to work out how much you can afford to borrow. The process takes less than 20 seconds and at the click of the button our calculator will estimate your monthly repayments after taking into account your estimated stamp duty, solicitor’s and transfer fees and lender’s mortgage insurance estimates.
Step 4: Pre-approval
Once you’ve considered some options, for deposits, repayments etc., speak to a Mortgage Corp lending specialist who can help you work through different lenders’ policies to find a home loan that is best suited to you. Apply for pre-approval for a loan that meets your budget and allows you to secure a solid investment property.
Step 5: Property Research
Use real property data to confidently find and secure investment properties with real potential. Mortgage Corp offers a free property report service that will help guide you with a true indication of the property value and provide insights into potential growth of the property.
Step 6: Arrange Conveyancer or Solicitor
Ensure your contract is reviewed by a qualified conveyancer and solicitor, and undertake any necessary searches and reports.
Step 7: Make an Offer and Settlement
Negotiate and/or bid at auction and sign on the dotted line (and pay the deposit if required). Let your lender/mortgage broker know and they will proceed to finalise the loan application.
Here’s what you can expect at our Loan Structuring Strategy session:
- We’ll discuss your goals and analyse your current situation to make sure you have access to discounted rates and conditions available right now
- We’ll unpack your entire lending strategy to-date and suggest ways to save interest, fees and tax
- We’ll dissect your current loan structure and discuss ways to free up cash to grow your portfolio faster. We explore how different lending options may help you achieve your financial goals sooner
To discuss how we can work with you on building and growing a solid property portfolio, book a Free Loan Structuring Strategy Session today!
About Mortgage Corp
Based in Mount Waverley, Mortgage Corp is the most loved mortgage broking firm in Melbourne with consistent 5 star customer reviews. Mortgage Corp specialises in helping successful professionals and property investors maximise their return and strategically structure your loan for long term investment success.
While most banks and brokers focus on merely getting you a loan, Mortgage Corp is committed to getting you a comprehensive investment result. Request a Free Loan Strategy Session with our senior mortgage strategist Neil Carstairs today!
Mortgage Broker’s service is free, why not get a good one? Mortgage Corp consistently receives 5 star customer reviews!
About Neil Carstairs
Neil is the founder of Mortgage Corp, an active property investor and awarding winning MFAA accredited finance broker with more than 10 years’ mortgage broking experience. Currently, Neil is one of only few MFAA Certified Mentors in VIC/TAS region.
He is known for his strategic approach to investing and ability to reach fast, successful outcomes for clients where his industry peers could not. Connect with Neil on LinkedIn.