Investment Property Loans

Ultimate Guide to Applying for an Investment Loan

Investment Loan Application Process:
What You Need to Know.

How to Apply For an Investment Loan?

The process of applying for an investment loan is similar to applying for a home loan, however there are some important factors that you need to consider.

Let’s explore the steps involved in applying for an investment loan.

Step 1: Determine Your Investment Strategy.

Before applying for an investment loan, it’s crucial to have a clear investment strategy in place. Determine whether you want to invest in residential or commercial property, and whether you are looking for negative gearing or capital growth. Having a clear investment strategy will help you choose the right loan structure and lender.

Step 2: Choose a Lender and Loan Structure.

Once you have your investment strategy in place, it’s time to choose a lender and loan structure. We can assist you compare lenders to find the most suitable interest rates, fees, and loan features that suit your investment goals. Consider whether you want a standalone loan, or if you prefer cross-securitisation or securitisation of your properties to purchase an investment property.

Step 3: Gather Your Financial Information.

To apply for an investment loan, you’ll need to provide your financial information to the lender. This includes details of your income, expenses, assets, and liabilities. You’ll also need to provide proof of income, such as payslips or tax returns if you are self-employed, as well as proof of your identity.

Step 4: Complete the Loan Application.

Once you have all your financial information, we can assist you to complete the loan application. The application will include details of the loan amount, the property you intend to purchase, and your financial information. Be sure to read the application carefully and provide all the required information to avoid delays in the loan process.

Step 5: Lender’s Credit Checks.

After submitting your loan application, the lender will perform a credit check to determine your creditworthiness. They will assess your credit score, employment history, and other financial factors to determine if you are suitable for the loan. They may also require additional documentation or information before approving your loan.

Step 6: Loan Approval and Settlement.

Once your loan application is approved, you’ll receive your mortgage documents from the lender. Read through these documents carefully, including the loan terms and conditions, interest rate, fees, repayment schedule and there may be some settlement conditions that need to be completed prior to settlement. Once all the documents have been returned and settlement met, the lender will instruct for their solicitors to book in and arrange for settlement of the loan, for you to proceed with the purchase of your investment property.

Why Investment Loans are Important?

Investment loans are designed to help you finance your investment property purchase, whether it’s for negative gearing or capital growth. The features of an investment loan can vary, and it’s essential to choose the right loan structure to suit your investment goals and plans.

Questions to Ask Yourself Before Applying for an Investment Loan

To ensure that you get the right loan structure, you need to ask yourself the following questions:

  1. Negative Gearing or Capital Growth: Are you planning to negatively gear your investment property, or are you looking to generate capital growth? Negative gearing is when your rental income does not cover your expenses, and you can claim the loss against your income tax. On the other hand, capital growth is when your property increases in value over time, and you can make a profit when you sell it.
  2. Property Ownership: Do you plan to buy the investment property in your own name, or do you prefer buying it under a company and trust structure? Owning an investment property under a company and trust structure can provide asset protection and tax benefits, but it may come with more administrative and legal requirements.
  3. Loan Structure: Do you need a standalone loan, or do you want to cross-securitise or securitise your properties to purchase an investment property? Cross-securitisation is when you use your existing property as collateral for your new investment loan, while securitisation is when your lender packages your loan with others and sells them to investors.

Navigating the loan structure options for your investment property can be a daunting task, and it is highly recommended that you seek advice from a professional such as an accountant or legal expert. With our guidance and the professional advice you receive, you will have a clearer understanding of the best path forward for your investment.

What Are The Advantages of Investing in Property in Australia?

Property investment is the most popular wealth creation method in Australia. Investing in property can offer investors several benefits, including capital growth, negative gearing, positive gearing, rental income or yield, and rental income with capital growth.

Capital Growth: Experienced investors often use the equity or capital within a property to purchase another investment property. As the value of a property increases, the loan reduces, leaving available equity between the loan balance and the property value. By using up to 80% of the property value, investors can avoid paying Lenders Mortgage Insurance. However, if they use more than 80% up to 90% of the equity, they will need to pay lenders mortgage insurance unless they have another property to cross-secure both properties.

Negative Gearing: Negative gearing refers to the situation where the overall costs of owning an investment property exceed the income it generates. The shortfall from the investment may be claimed as a tax deduction, which reduces the investor’s overall taxable income.

Positive Gearing: Positive gearing means the rental income derived from the investment property exceeds the finance costs and ownership of the property, including lender interest and fees, investment property and maintenance costs.

Rental Income: Some investors prefer investing only in apartments or units due to the minimal maintenance requirements in these investments and the benefit of receiving rental income with less fuss. The unit complex or real estate agency is appointed as a property manager to oversee the investment, generating good rental returns with minimal capital growth.

Rental Income with Capital Growth: Other investors prefer houses to generate good capital growth in an investment property to help generate equity to purchase the next investment property. While they wait for the equity to build within an investment property, they also receive rental income to cover most of the expenses and finance borrowing costs.

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A Golden Rule!

Have a Solid Investment Strategy in Place Before Applying for a Investment Loan.

Investment Loans in Company, Unit, Family, Discretionary & Hybrid Trust Structures?

When it comes to investment loans, the type of structure you use can have a significant impact on the loan options available to you. Companies and trusts have different loan requirements compared to individuals, and not all lenders offer loan structures for these entities.

For instance, if you plan to invest in property through a company or a Unit or Family Discretionary Trust, it’s important to research and choose a lender who can provide the appropriate loan structure. Specialised investment lenders are available for these borrowing instruments, but not all lenders will offer loans for hybrid trust structures.

Moreover, if you require a 90% investment loan facility through a company trust structure on an interest-only basis, only a few lenders will be able to assist with this. It’s vital to seek advice from a professional mortgage broker like us at Neomoney who has experience in these areas and can guide you through the complex process of obtaining an investment loan for your company or trust.

What Is Better, Investment Yield or Investment Value?

When considering an investment property, there are two important factors to consider: investment yield and investment value. Investment yield refers to the rental income generated by the property, divided by the expenses and outgoings associated with the investment. On the other hand, investment value or growth refers to the value generated by the property from the time of purchase up until its current estimated valuation or value.

Property investors typically prioritise investment yield over investment value, as a higher rental yield can generate positive cash flow and limit the amount of out-of-pocket expenses required to cover loan repayments. In other words, if the rental income generated by the property is higher than the loan repayments, it would be classified as a cash-positive investment rather than a negatively geared property.

However, it’s important to note that higher-valued properties generally return lower yields. On the other hand, a property with lower value may have higher rental yield potential. Therefore, it’s important to find a balance between investment yield and investment value to ensure that the investment property is generating positive cash flow while also appreciating in value over time. It’s recommended to seek professional advice from a mortgage broker or financial advisor to help you evaluate and prioritise investment yield and value when making property investment decisions since everyone’s income and expenditure are case by case.

What Factors Determine How Much Can I Borrow For an Investment Property?

The amount you can borrow for an investment property depends on several factors, including your income, expenses, credit score, existing debt, and the value of the property you wish to purchase.

Lenders assess your borrowing capacity by evaluating your ability to service the loan, which involves verifying your income, employment status, and liabilities. They will also consider the rental income potential of the investment property, which can contribute towards your ability to service the loan.

To determine how much you can borrow, it is essential to conduct a financial borrowing assessment and create a budget that outlines your income and expenses. You can use our online calculators or seek the help of a mortgage broker to estimate your borrowing capacity. Keep in mind that borrowing capacity is not the same as loan approval, and the lender will assess each application on a case-by-case basis however with our assistance you will have an indicative guide and idea of your investment purchase capacity.

What is Capital Gains Tax (CGT)?

Capital Gains Tax (CGT) is a tax on the profit you make when you sell a capital asset, such as an investment property, shares or managed funds, and it applies in Australia. The CGT is calculated based on the difference between what you paid for the asset and what you received when you sold it.

However, if the property was your main residence throughout the ownership period, any capital gain or loss from that property is generally calculated depends on where your income falls in the relation to your personal situation and thresholds for CGT purposes. But if you have also used the property for income-producing purposes, such as renting out a portion of it, a partial CGT maybe payable at a deferent rate. It is important to note that there are specific criteria that must be met to qualify for the exemption.

In cases where a capital gain has been made and you have owned the asset for at least 12 months, you might be eligible for a 50 percent discount on the amount of the capital gain for CGT purposes.

It is highly recommended to seek professional advice from your accountant to understand your CGT obligations and how they apply to your specific situation. The Australian Taxation Office website is also a good resource for more information on CGT.

Click here to go to the Australian Taxation Office website for more information on CGT, additionally you should obtain advice from your accountant.

Title Transfer: What is it and how does it work?

When you buy or sell a property, the ownership must be transferred from one person to another. This process is known as a title transfer. To make the transfer official, a land transfer form needs to be lodged and registered with the relevant State Titles Office. This document records the change of ownership.

Your solicitor or conveyancer will usually handle the transfer of title deeds for you, and will charge an administrative fee as part of conveyancing costs. The cost of registering the title transfer varies depending on the state or territory where the property is located.

It’s crucial to understand that a title transfer is distinct from a property settlement, which is the completion of the sale or purchase of a property. The title transfer is solely concerned with the legal procedure of changing ownership. Conversely, the settlement process includes the transfer of funds and other responsibilities between the buyer and seller. Moreover, the title transfer fee is levied twice. The first charge is for releasing the outgoing lender, and the second charge is for the incoming lender.

If you’re buying or selling a property, it’s important to work with a reputable solicitor or conveyancer who can guide you through the title transfer process and ensure that everything is done correctly.

What is The Property Purchase Settlement Process?

The property purchase settlement process is the finalization of the sale or purchase of a property. Once the necessary documentation is completed and the investment loan is approved, the lender will send out the mortgage documents for the buyer to sign and return. It is important to note that most lenders will require the buyer to seek legal and financial advice before returning the loan mortgage documents.

Once the settlement is booked, the lender’s solicitor as well as the buyer’s conveyancer/solicitor will confirm in writing that settlement has been scheduled. On the day of settlement, the transfer of ownership and funds takes place. The buyer’s conveyancer or solicitor will arrange for the settlement to occur and will liaise with the seller’s solicitor or conveyancer to ensure everything runs smoothly.

It is important to note that the settlement process involves the transfer of funds and other obligations between the buyer and seller. After settlement, the new lender will confirm in writing that settlement has occurred and provide the buyer with their new investment loan details within a week or two. Between the lender’s solicitor and the buyer’s conveyancer, a disbursement letter will be received to show who was paid from the loan disbursement.

It is crucial to have a conveyancer or solicitor to guide you through the settlement process and ensure a smooth transaction.

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