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Finance & insurance for investment properties
Financing your investment property
Securing investment property finance is similar to getting a mortgage for your own home, but with one key difference: most investors leverage existing equity rather than relying solely on a cash deposit. With that said, lenders will still assess your financial situation, including your income, expenses, and credit history, to ensure you can comfortably manage the investment. So, even with equity behind you, it's crucial to have your financial house in order before applying for an investment loan.
Accessing equity in your existing home
If you already own a home, you may be able to use the equity in that property to finance your investment.
To access your usable equity, you’ll need to refinance your existing mortgage to free up some funds. You can then use the equity to put down the deposit on your new property and secure a home equity loan. How much equity you can use will vary between lenders, so it’s a good idea to sit down with a home loan specialist and talk through your options.
Key considerations when leveraging home equity for investment property loans
example
Calculating gross rental yield
Lenders typically allow borrowing up to 80% of your home's value. To work out your usable equity, calculate 80% of your home's market value and deduct your mortgage balance. For example, on an $800,000 home with a $300,000 mortgage, you’d have $340,000 in usable equity. This can fund a deposit and buying costs for an investment property. If it’s not enough, you'll need to pay the rest in cash. It's always best to chat with a financial advisor to understand your specific investment situation.
Learn moreLenders Mortgage Insurance (LMI)
If you borrow more than 80% of the property's value, you'll usually be required to pay Lenders Mortgage Insurance (LMI). This protects the lender if you default on your loan. LMI can be a significant cost, so it's worth aiming for a deposit of at least 20% to avoid it.
What lenders assess
When you apply for an investment property loan, lenders will thoroughly assess your financial situation. They want to be confident that you can comfortably afford the loan repayments, so they'll consider your income, expenses, and credit history. Lenders will also assess the property itself, considering its value, location, and rental income potential. They want to ensure the property is a sound investment that can be easily sold if needed.
Calculating your borrowing capacity
You can use a mortgage calculator to estimate your borrowing capacity based on your income, expenses, and deposit amount. This will give you a good starting point for your property search.
Other costs and considerations
Besides your mortgage repayments, there are other costs associated with buying and owning an investment property. These may include:
- Stamp duty
- Conveyancing fees
- Legal costs
- Pest and building reports
- Agent's fees (if selling)
- Advertising costs (if selling)
- Capital gains tax (if selling)
- Council and water rates
- Building insurance
- Body corporate / Strata fees (if applicable)
- Land tax
- Property management fees (if using an agent)
- Repairs and maintenance costs
It's essential to factor these costs into your budget and investment strategy.
Landlord insurance
While not compulsory, it’s a good idea to take out a landlord insurance policy to protect you against a variety of risks. Policies vary but will typically cover you in the event of:
- Theft or burglary by tenants or other parties
- Malicious damage or vandalism by tenants
- Loss of rent.
- Legal expenses required to evict a tenant.
First time investor?
Whether you're curious about the basics or seeking expert advice, we are here to help you take your first step towards a successful investment journey.
A more rewarding future
Learn the basics of property investing, from essential terms to making the most of your finance opportunities.
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All opinions, estimates, forecasts, links to external websites, conclusions and recommendations and underlying assumptions contained within this webpage are made and expressed by Frasers Property Australia in good faith, in the reasonable belief they are correct and not misleading as at the date of publication. This publication and its content do not represent financial or other professional advice and should not be regarded as such. Before acting on any information provided, you should fully consider the appropriateness of the information, having regard to your objectives, financial or taxation situation and needs and, if necessary, seek appropriate professional advice.