When property values fall, as they have in recent years, it can be tempting to seize the moment and step into the market. After all, you’ll get more bang for your buck.
But will a lender agree that you can afford a real estate investment? Here are five questions to ask yourself to know if the time is right for you buy a rental property.
1. Do you have a deposit?
The bigger your deposit, the less you have to borrow. But as the interest paid on an investment loan can normally be claimed as a tax deduction, investors often have less incentive than home owners to stump up a large deposit.
In fact, it may not be necessary to have a 20% deposit. Plenty of lenders only require a 10% deposit, sometimes less, though this will mean paying lenders mortgage insurance (LMI).
Your Mortgage Choice broker can explain the minimum deposit you need to get started with an investment property.
2. Can you unlock the equity in your home?
If you’re a home owner it may not be necessary to provide a cash deposit at all.
The equity built up in your home can often be used in lieu of a cash deposit. This allows cash savings to be preserved for other purposes, like a few renovations on the investment property.
As a general rule of thumb, the maximum home equity you have available to use as a deposit is typically calculated as 80% of your home’s value, less the balance of your home loan.