Investing in property can be a great way to build wealth over the long term, especially in a country like Australia where property prices have historically shown solid growth. However, financing an investment property can be more complex than financing a primary residence. Here are some things you should know about finance for an investment property in Australia.
- – LVR (loan value ratio)
Lenders in Australia typically require allow up to a maximum LVR of 90% to purchase property, which includes the cost of lenders mortgage insurance (LMI). - – INTEREST RATES
Interest rates on investment property loans are usually higher than those for primary residences. This is because investment properties are seen as a higher risk to lenders, particularly if you are borrowing more than 80% of the property’s value. The interest rate you receive will depend on a range of factors, including your credit history and the size of your deposit. The interest rate will also be higher if you chose interest only compared to principal and interest payments. - – CASH FLOW
When considering an investment property, it’s important to think about the cash flow it will generate. This means calculating the difference between the income you receive from renting the property and the expenses you incur, such as mortgage repayments, property management fees, and maintenance costs. If your cash flow is positive, this can be a good sign that the property is a good investment, although the growth in the value of the property is likely the most important factor to consider. If the cash flow is negative, you may need to think carefully about whether you can afford to cover the ongoing costs of the investment property. - – TAX IMPLICATIONS
Owning an investment property can have a range of tax implications in Australia. For example, you may be able to claim deductions on expenses such as interest payments, property management fees, and maintenance costs. On the other hand, you’ll also need to pay tax on any rental income you receive. It’s important to consult with a tax professional to ensure you are meeting all your obligations and maximising your tax benefits. As a general rule, if the property creates a loss, you are able to offset that loss against personal income if the property is held in individual names. - – SPEAK TO THE EXPERTS, ACCOUNTANT and BUYERS ADVOCATES
Following on from the above point, it is important to speak to the experts about a range of issues such as:- Obtaining a deprecation schedule to assist with reducing tax. The newer the property the likely the higher depreciation benefits which is one reason many investors like to construct new investment properties.
- Negative gearing and tax implications
- Buying the property in individual names or a trust for asset protection or tax purposes
- A buyers advocate can provide great assistance in providing property advice, especially for those considering purchasing in interstate locations.
- – CONSIDER USING A MORTGAGE BROKER.
Navigating the world of investment property finance can be complex, which is why many people choose to use a mortgage broker. As of 2023, around 70% of all residential loans are written via mortgage brokers. A broker can help you find the right loan product for your needs, negotiate with lenders on your behalf, and guide you through the application process. They can also provide valuable advice on aspects like bank policy and interest rates.
CONCLUSION
Purchasing and constructing investment properties can be a great way to build long-term wealth, but it’s important to understand the financial implications before you make a purchase. By knowing about things like LVR requirements, interest rates, cash flow, tax implications as well as consulting experts such as accountants, buyers advocates and mortgage brokers, you can make informed decisions about your investment property purchase.
