It seems like a no brainer, right? You are buying a home, so you’ll pay off your credit cards to reduce your debt, but keep them active so you can buy some furniture or deal with emergencies even when you have a mortgage to pay. Wrong.
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Interest rates are a big factor in each repayment and the total cost over the life of a loan, so staying on top of your current rate as well as the interest trends across the market is essential.
As property prices continue to rise, purchasing in a centrally-located or sought-after area is out of reach for the average working millennial. Instead, many are opting to rent rather than buy as it means not having to compromise their inner city or beachside lifestyle. But for those who are still eager to enter the market, there is a way to get the best of both worlds.
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Lender’s mortgage insurance (LMI) is required in many instances when a loan is worth more than 80 per cent of a property’s purchase price, as well as in some other circumstances. In very basic terms, when a lender considers a loan to carry a high risk, LMI is likely payable. Here’s how you can avoid paying the costly premium.
Some of the most important decisions a business owner will make are about their premises: whether to rent or buy, where to base the business and even the style of the property are important to get right. For those with an SMSF, there is one more option to consider: landing business premises and an investment property at the same time.
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If you apply for a home loan, particularly if the loan is for more than 80 per cent of a property’s value, you’ll more than likely have to prove to lenders that you have a satisfactory amount of savings. This is to demonstrate your ability to funnel a portion of your income into repayments.
Before you take the leap into a holiday-home investment, it is essential that you consider all angles. This means taking your heart out of the equation and giving thought to rental returns - which means location really is king.
Rising house prices are making it increasingly difficult to enter the market. Parents who guarantee their children’s loans can help, but it is important to understand how this can impact the parents’ retirement or investment plans.
It’s easy to understand why we look for the largest, most prestigious properties we can afford – we are constantly urged to define our success by our possessions: bigger, better, newer, faster, shinier. A relatively recent counter-movement, however, urges lower impact, fewer goods and less consumption, and at its core nestles the tiny house.
While you may not need a six-figure salary to invest in property, those who earn a relatively low income will require a little more creative thinking to start a portfolio. Here are some tips to help you get started.
Find an investor-friendly loan
The challenge for low-income earners, explains the finance broker, is the time taken to save for a sufficient deposit. Some lenders require a higher deposit for an investor than is required for an owner-occupier, so seek out a lender and loan that is investor friendly, or consider living in the property for a period after the purchase before converting it into an investment property as your portfolio grows.
In any case, having at least 10 per cent of the property’s purchase price as a deposit will not only increase the likelihood of loan approval, it will also increase your borrowing capacity and lower the risk that you will have to pay lenders’ mortgage insurance (LMI).
Prove your financial discipline
Your lower income on an application can be offset by proving yourself a low risk borrower. Having genuine savings will not only highlight to lenders your ability to consistently meet financial payments and live within your means, it is also an opportunity to increase your borrowing power. The same can be said for lowering any existing debts.
“Keep credit card limits as low as possible as lenders always calculate servicing based on the limit, not the balance,” advises the broker. “Also, try to pay off any personal or car loans before applying for an investment loan. Because of the short-term nature of these commitments, repayments can have a significant impact on an applicant’s borrowing power and should be paid out where possible.”
Choose the right property
When it comes to choosing the property, low-income earners will generally do well to steer clear of anything that’s negatively geared, as you are not trying to offset your high income with losses, and remember the importance of profit over property.
“In my experience, regional areas is where to turn to, as the entry point to the market is lower,” says the finance broker. “Although there will generally be less capital growth, there are higher rental yields on offer.”
Seek out different strategies
For those who don’t have other non-deductible debt they want to pay down first, adopting a principle and interest payment is the obvious choice, advises the finance broker. Interest-only loans are only suitable in specific circumstances when strong exit plans are in place, while principle and interest payments reduce debt, freeing up borrowing capacity and allowing the borrower to leverage equity.
Investing with a close friend or relative is another way to enter the market for those who earn a low income. As long as agreements are in place, including who is responsible for the mortgage and what happens if one owner defaults, how the property will be used, in what circumstances it may be sold, and how maintenance will be paid for, co-ownership is preferable not owning a property at all.
Find the right loan
Recent research suggests that as many as 60 per cent of applicants who are rejected by the major banks would be eligible for a loan through a specialist lender. Specialist or non-conforming loans do carry higher interest as a rule, to account for the higher perceived risk the lender is taking, but a good finance broker will see this type of loan as a stepping-stone to a prime loan, and help their client prove themselves so that they can switch to a prime loan after a year or so.
Property investment may not be as straightforward to low-income earners, but in most cases is accessible, provided the right properties and finance products are sought out. For further insight, contact Skybridge Capital on 9221 4888.
In an attempt to curb the high competition of the Australian housing market that locked out many would-be first home buyers, the Australian Prudential Regulation Authority (APRA) in late 2014 signalled its intention to keep a close eye on a suite of concerns, including the levels of residential lending to investors.
Urgent maintenance is an unavoidable aspect of being a landlord, so having a cash buffer set aside will help you deal with any unexpected problems.
With interest rates at an all-time low, taking the option of locking in an interest rate on your home loan to guard against possible future fluctuation may be attractive. However, it pays to know the ins and outs of fixed-rate loans before committing to one.
Despite owning a growing business and supplementing his income with a pension from the ADF, former soldier Jake Briggs was told by his bank that he could not secure finance to purchase a home. So he found a broker who knew better.
