Financing options for your investment property

Discover the different ways to raise finance for an investment property

Deposit and finance options

It’s important to explore of the different strategies that could help finance your investment property.

Savings

It makes sense to put your savings to work as a deposit. But how much cash will you really need? The answer varies between lenders. Some banks may only want to see a deposit of 10% or even 5%. But expect to pay lenders mortgage insurance if your deposit is less than 20% of the purchase price.

Remember, buying a rental property involves costs such as legal fees and stamp duty. It is a good idea to plan and budget for these.

Using equity

It may be possible to use the equity in your home or another property instead of a cash deposit. This can work if you have funds tied up in other investments and want to preserve cash.

Equity is the difference between your home’s market value and the balance owing on your home loan. For example, you have equity of $300,000 if your home is worth $500,000 and there’s a balance of $200,000 on your mortgage. This money could be used to provide security on an investment property. When they decide how much equity can go towards your property purchase, lenders will also consider other factors including your income and living expenses.

Inheritance and gifted deposits

An inheritance or cash gift deposit could help fund a rental investment. But banks still want to be sure you can manage the loan repayments. They do this by looking for evidence of regular savings. How much you need varies, although some lenders like to see six months of savings.

Trusts

It may be possible to buy an investment property through a trust. This allows a group of people known as beneficiaries have an interest in the assets held by the trust. A trustee is appointed to manage these assets and the beneficiaries receive any income earned by the trust.

Family discretionary trusts are popular among property investors. They allow trustees to divide the trust’s income between different family members. It may be a way to take advantage of different family members’ personal tax rates. Keep in mind trusts cost money to set up and maintain. So be sure the benefits outweigh the expense.

Trusts may have drawbacks for property investors. Any losses made by the trust can’t normally be passed on to the beneficiaries. This is worth noting if you plan to negatively gear a property. The beneficiaries might be asked to guarantee the loan when a bank lends funds to a trust.

Speak to your tax professional and solicitor about whether a trust is the right way to finance an investment property.

Investing with low to no income

It may be possible to finance an investment property even if you earn little to no income. This is because different lenders have their own criteria to determine eligibility for a loan. Some lenders may look closely at your income to be confident you can keep up repayments.

Also, wage and salary payments aren’t the only income lenders consider. Property rent, regular government benefits and dividends may also be acceptable forms of income.

Lenders like to see you have built up a pool of savings. This shows you have the financial discipline to handle a loan. A low level of personal debt and staying on top of regular household bills are also attractive.

Your FND Broker can help you understand your options for an investment loan.