So you have finally made the decision to purchase an investment property. Congratulations! This will be an exciting (and sometimes stressful time for you), however it is important that you prepare yourself in order to get yourself in the best position possible before submitting your mortgage application.
You do not want an application to be turned down because you have not prepared yourself. An unapproved loan application can be detrimental to your credit rating as it leaves a footprint on your credit history – the more applications (be they successful or not) can negatively affect your credit rating.
Unfortunately lenders use many different criteria in order to assess if you can borrow from them i.e. your salary, weekly running costs, outstanding debt level, number of dependants and credit history. I wish that there was a tick and flick list that could be used by all lenders but I suppose it is their differences that keep them competitive.
I think that it is important to understand how how a lender will assess your eligibility to borrow funds. There are certain factors that can make it easier or virtually unworkable for you to obtain finance.
Daniel Dos Santos from AMD Finance advises “that there are several things that you should do in order to prepare yourself”:
Your lender is going to do a credit check on you. They’ll be looking at any credit applications made by you and will be checking if you’ve defaulted on payments or have an infringement referenced either in your name or your company’s name (if you are self employed).
Make sure that you have a ‘clean slate’ by checking your credit report. There is no use applying for a loan only for it to be turned down because you forgot to pay an old store card etc.
You can order your personal credit file online by googling “credit history report”
- Enter your personal information,
- pay by fo the report and your credit file will be forwarded to you usually in an email as a PDF file.
If something appears on your report that you are unaware of fix it ASAP.
You should bring this report to your appointment with your broker/lender.
Know your limits
The amount you can borrow for your investment property will depend on many factors such as your deposit or other equity you hold, what you are buying, the expected rental income, whether you will be negatively or positively gearing the property, property management costs and if you have allowed for a period of vacancy.
This is where your broker can help you to work out how much you can borrow and what type of loan will suit your budget and lifestyle.
Organise your Deposit
Most lenders require a minimum 10% deposit (and evidence of you saving this), however if you are borrowing 80% or more of the purchase price you will normally be required to pay mortgage insurance (which means an additional fee).
The way you structure your investment loan will depend on your personal circumstances and should be discussed with your accountant or financial adviser prior to meeting with your lender/broker.
A deposit bond is a guarantee to the vendor, by an insurance company, that they will receive their 10% deposit, even if the purchaser defaults on the contract of sale. You, the
purchaser, are able to provide this guarantee to the vendor by paying a small premium to the insurance company. All purchase funds are paid at settlement. In the ordinary course of events, settlement takes place, the purchase price is paid in full and the
deposit bond simply lapses.
We are buying it together…
The most common way to buy a property with two or more people who aren’t a married or defacto couple is through a tenants-in-common arrangement. This allows the property ownership to be split any way, not necessarily into equal shares. Three people can buy a third each, or it can be divided in other proportions. This means your share of the property can be left to the person of your choice when you die.
In contrast, a property owned under a joint tenant arrangement (usually by couples) is
where the property is held in equal shares. If one owner dies, their interest passes to the
other owner. Shared property ownership only works if strict ground rules and a tight contract are in place. Everything needs to be in writing. Your legal representative should be consulted.
The two most important points you need to cover are what happens if one owner wants to sell their share and what happens next.
The amount of stamp duty payable varies from state to state and whether you are a first home buyer or an investor. Your conveyancer/legal representative will advise you of the amount payable or you can check your state’s website.
Make sure you are aware of stamp duty costs, you may have to factor this into your loan amount.
Loan application fee
There is a standard upfront loan establishment fee. The fee covers the preparation of loan application documentation, legal fees for standard mortgage preparation and one
Applying for a loan
If you’re approaching a lender for the first time you’ll need to be ‘identified’.
When you apply for a loan you have to show identification up to the value of 100 points. A driver’s licence earns 40 points, a credit card can earn 25 points and a birth certificate 70 points. Only original documents qualify.
It’s not unusual for a loan application form to take up to 10 pages. Your lender will want
to ascertain your existing assets, capacity to repay, financial risk, collateral (is the property you are buying adequate security for the amount borrowed?). You will also be asked if you have dependent children, how long you have lived at your current address, what you owe, your personal insurances and your credit card details.
It is advisable to have your two most recent pay slips, group certificates for the past two years and documentation from your employer detailing income and length of employment.
Self employed applicants should provide their past two years’ ATO assessment notices
or their past two years’ financial statements and accountant’s details. Some institutions
may even ask for a profit and loss statement certified by a registered accountant.
Also needed are savings details, bank statements including transaction, saving
or passbook accounts, investment papers including managed funds or term deposits,
what you owe and own, details of personal loans, credit cards or charge cards and
tax liability if self-employed.
Details of life insurance policies and superannuation as well as approximate value of other assets such as furniture and jewellery should also be included.
Remember to include your expected rental return in your loan application. This will affect your borrowing capacity and loan serviceability and may allow you to purchase a more expensive property. Your real estate agent will be able to provide this information.
I know that there is a lot to consider and to obtain from various third parties however it is much better to be prepared so that your broker/lender can get a picture of your credit history and ability to borrow funds now than after you have made an incomplete application.
It is best to have your loan pre-approved before you make any offers. Knowing that your finance is pre-approved will allow you to concentrate on a price range and give your full attention to the purchase. Remember that a vendor may also accept a lower than advertised price knowing that your finance is organised. They may want a quick and hassle free sale.
Once your loan is formally approved, the lender will arrange mortgage documents to be signed. Be sure to read the mortgage contract carefully and understand the contents.
Professional property management frees you from dealing with tenant issues and gives you more time to concentrate on your portfolio. Your property manager is also up-to-date with changes to the Residential Tenancies Act and is better suited to negotiate with your tenant on your behalf should the need arise. They are also in a position to obtain credit checks on potential tenants and have access to tradespeople. If you prefer to stay one step removed and not deal personally with your tenants, then a professional property manager is definitely recommended.
So once you have your loan pre-approved, the next step is finding your new property. My biggest tip here is to find a real estate agent that you get along with. They usually know of properties that are coming onto the market before they hit the internet etc. I have sold many properties without having to advertise them. In a lot of cases tenants will buy the property they are renting – all you have to do is ask the question.
Once you have found your ideal property, you will need some assistance from other professionals.
You will need to appoint a legal representative to ensure that the contract is in your best interest and does not contain any unsatisfactory terms. Make sure you know your legal representative’s qualifications and exactly what service they are offering as well as their costs. I have found that their fees vary considerably from office to office.
Your legal advisor is there to:
• Give advice on the property contract
• Facilitate council, strata and company title searches
• Order pest and building inspections
• Arrange for the exchange of contracts
• Negotiate with the vendor’s solicitor on your behalf
• Arrange for the settlement process, and
• Deal with any difficulties that arise during the settlement period.
It is a good idea to ‘shop around’ for someone experienced.
Building & pest inspectors
Building and pest inspections are a must! Your conveyancer will enlist the services of an authorised pest and building inspector. Your purchase contract can be subject to a satisfactory inspection or your inspection can be scheduled during your cooling off period.
The inspector will provide a written report pointing out any faults in the property, whether they can be repaired and how much these repairs are likely to cost.
If buying at auction you will need to ensure that all inspections are completed prior
to the day of the auction. In the case of a strata title property, your contract for sale will provide the name of the strata manager so that you can arrange for an inspection of the books and records of the owners’ corporation.
Your legal representative should also advise you of any future developments
which could affect your home by checking the local council records.
There are some insurance policies that you should look into:
MORTGAGE PROTECTION AND LENDER’S MORTGAGE
Mortgage protection and lender’s mortgage insurance (LMI) are for two different situations.
Mortgage protection is insurance that supports you in case you become involuntarily unemployed or are unable to work due to illness or disability. It makes sense to ensure that you can continue to meet your commitment in the case of unforeseen events.
However lender’s mortgage insurance is usually required where your deposit is less
than 20% of the purchase price of your property and protects the lender in the event
that you default on your repayments.
Life insurance provides a lump sum payment to your beneficiaries in the event of your death. If you are the main income earner in the family, this insurance will help your family manage their future (for example paying out mortgages, schooling and other family expenses) without your ongoing earning capacity.
Landlord insurance is a policy to cover an investment property owner from financial
losses. Common features of a landlord insurance policy include malicious or intentional damage to the property by the tenant or their guests, theft by the tenant or their guests, loss of rent if the tenant defaults on their payments, liability including a claim against you by the tenant, and legal expenses incurred in taking action against a tenant.
TPD – TOTAL AND PERMANENT DISABILITY
You can choose to cover yourself for either total or permanent disability or death options, providing you can no longer work or in the event that you die due to illness or accident. When combined with life insurance, this can provide security for you and
Building insurance should provide you with adequate cover in the event you need to repair or replace your investment property (ie home, garage, shed). Flooding and fire can leave you with a property that is not fit to live in, you need to cover yourself.
Income protection insurance pays you a predetermined percentage of your monthly
income should you be unable to work due to illness or injury.
Land tax is an annual tax levied on owners of land. In general, your principal place of
residence (your home) or land used for primary production (a farm) is exempt from land tax.
Investment property, on the other hand, may be subject to land tax and the rate of tax varies from state to state. Your broker/lender can help with the rates applicable in your circumstances.
Your broker/lender can provide you with information on stamp duty in the state of your purchase, comparisons of various loan application fees and have access to insurance recommendations.
Good luck! Let me know if you have found this to be useful and informative.
Disclaimer: The advice contained in this document has been prepared without consideration of your objectives, financial situation, personal circumstances or individual needs. Whilst care has been taken to ensure the accuracy of the information contained herein, it neither represents nor is intended to be legal or taxation advice. Please consider the appropriateness of this information before acting on any advice from this booklet. Harringtons Realty & AMD Finance aims to understand your circumstances and requirements to provide you with a loan and other products that are best suited to your needs.