Signalling the return of competition to the mortgage market – albeit a slow return – a number of second and third-tier lenders are working hard for market share. Potential property investors looking to take advantage of higher rental yields and relaxed buyer competition should take note that a number of these lenders are introducing special offers for limited periods.
While tighter lending criteria is making it more difficult for potential buyers to borrow, there are opportunities for those who are well prepared and keen to shop around for a suitable home loan deal.
It's not just first home buyers who are potentially missing out on purchasing property thanks to stricter lending criteria. Property investors looking to take advantage of positive market conditions by expanding their portfolio and those looking to invest for the first time are also being confronted.
A number of smaller lenders are now introducing special offers that all borrowers, including investors, can take advantage of. Reputable mortgage brokers will show borrowers how they can meet tighter requirements and assist them in identifying home loans that can enable them to make the most of a property investment strategy.
Expanding a property portfolio should be easier with the right guidance around mortgage choice. If researched properly, with the understanding that it is usually best as a long term strategy, property investment can do wonders to increase someone's financial worth.
Savvy investors looking to get in the market now or spend less time positioning themselves further down their investment path are already investigating all their mortgage options, including home loans offered by second and third-tier lenders. These property investors are utilising all the tips available to take advantage of the tax benefits and financial gains offered by property investment.
Mortgage Choice has the following five tips for property investors:
- Use the equity from another property - Tapping into your home's equity, or equity from another property investment, can be a great launching platform for buying an investment property. According to Mortgage Choice's latest investor survey, 60% of those looking to buy an investment property before mid 2011 plan to access the equity in their home in order to fund all or part of their investment property purchase. How does this work? Say your home is valued at $700,000 and you owe $350,000 on your mortgage, you can use the $350,000 equity in your home to pay for up to 100% of the new property, or if it is more expensive you may be able to borrow more with some lenders.
- Pick a loan tailored to your investment strategy – Meeting lending criteria is only half the challenge; another big one is choosing a loan. Think carefully about interest only vs. principal and interest options. Although interest only loans will not reduce the loan amount, they do result in smaller monthly repayments and allow you to make greater contributions to your principal place of residence or to invest in another asset, all the while allowing the investment property to grow in value through capital gains.
- Consult a buyers agent/property finder – Seek professional advice about what type of property will maximise your investment. Most investors want property to secure them (as an average over the entire loan term) an annual return on investment that is higher than the costs eg. if net rent is 3% and the interest rate is 7% then it only needs to grow in value at more than 4% to be profitable. Experienced buyers agents know the market better than most and are a valuable resource for advice and for negotiating with property sellers and/or their agents.
- Positive vs. negative gearing - Expenses you incur on an investment property are tax deductible. If your loan repayments, fees and other property-related costs exceed your rental income, the net loss can be offset against other income you derive, reducing the amount of tax payable on that income. This is called negative gearing. Or, you may consider positive gearing, where the annual rental income received from the property covers or is higher than the repayments and costs.
- Consider all the costs – It is crucial to create a detailed budget outlining your outgoings and earnings. Property investment usually incurs unexpected expenses and it is easy to go over budget on improvements and repairs. Don't fall into the trap of relying on your property's income to cover additional costs such as new hot water systems or interest rate rises. Also think about capital gains tax you will have to pay if you decide to sell the property. Be sure to consult your taxation advisor.