Whether you’re a long-time investor or looking to purchase your first investment property, one of the first steps in your home buying journey will be to discover how much you can borrow in a mortgage.
There are several factors that may influence the amount that a lender is willing to offer you, including your personal financial situation and the lender themselves. This is why it’s crucial that you do your research beforehand to align yourself with the right investor home loan for your needs and budget. There are more options out there than your childhood bank, and a new lender may be able to offer you a more competitive home loan, helping you to keep your expenses low.
Let’s explore the factors that may influence how much you can borrow as an investor, and the calculators that can help you discover your borrowing power.
How much can you borrow for an investment home loan?
First things first, if you’re looking to get a quick understanding of how much a lender may let you borrow for an investor mortgage, it’s worth utilising Reduce Home Loans Borrowing Capacity Calculator.
This tool will take an assessment of your personal financial details, such as your income and expenses, to give you a rough idea of what a lender could offer you for a mortgage. This is because it offers a general assessment of the actual information a lender will look at to determine your borrowing power.
- Enter your ideal loan details, such as the loan term (generally 20-30 years) or the interest rate (compare options here).
- Enter your income details, like your gross income, pre-tax income, and any rental income you already earn.
- Enter your expenses, such as your living expenses, any current loans, car repayments, and your credit card limit.
- Enter your number of dependents
- Press Calculate
The results will then display, based on the information you’ve provided, what your estimated home loan amount may be. You’ll also see an estimation of the monthly repayments you’d be paying based on the interest rate and loan term you suggested. Further, you’ll also be shown the estimated interest charges over the life of the loan, which can be helpful for investors to forward project potential profits, less this expense.
For example, you’re an investor looking for a 25-year loan term, and you’re interested in Reduce Home Loans Investor Rate Slasher Special loan at a rate of 3.74% (accurate at the time of writing). Your annual gross income is $120,000, your monthly living expenses are $3,800, you spend $250 a month on car repayments and your credit card limit is $2,000. After entering these details into the calculator, Reduce Home Loans has determined that your estimated borrowing power is:
- Total loan amount you may borrow = $531,000
- Monthly repayments = $2,727
- Total interest payable on loan: $287,144
Please note: The results of this calculator are estimates and provided as a guide only. Calculations should not be considered as any form of quote, loan offer, or lending advice.
What influences an investor’s borrowing capacity?
Unless you have the capacity to purchase a home outright, you’ll likely need to take out a home loan to buy your investment property. However, it’s hard to know how much you can spend on a home at an auction without already knowing how much a lender will lend you beforehand.
While the specifics of each lender’s serviceability tests and lending criteria, as well as how they calculate your borrowing power, can differ, there are some general rules of thumbs you can look to that will influence what a lender offers you:
Your income – A lender will assess your income, including any income earned from existing assets, like rental income, to determine your borrowing power. The specific amount that you can afford will depend on the lender itself, but it’s worth considering some common rules of thumb, such as not spending more than 30% of your income towards mortgage repayments as this is classified as ‘mortgage stress’.
Your expenses – A lender will then need to subtract your expenses from your income to gain a better understanding of what you can realistically afford for a mortgage. For investors, this includes factors like any existing debts, like a current investor loan. The lender will also look at discretionary spending patterns too, such as regular takeaway meals or online shopping, and add this to your list of ongoing expenses. It’s important to keep in mind that every little expense counts, so if you’re looking to apply for a home loan, consider reducing your discretionary spending as much as possible in the months leading up to the loan application.
Your credit history – Your credit file and credit score will also be reviewed with a fine-tooth comb. When you apply for a home loan the lender will perform a hard credit check on you to determine your creditworthiness, and likelihood you can responsibly service the loan.
Property deposit – Whether you’re utilising equity in an existing property, or you’ve saved up a nest egg, the deposit you save also factors into your potential borrowing power. For example, most lenders favour borrowers with deposits of at least 10%, with 20% considered ideal – and to avoid paying costly Lender’s Mortgage Insurance (LMI). Keep in mind that investors are typically excluded from stamp duty concessions and exemptions, so you may need to factor all these upfront costs into your property investment loan.
A lender will assess your loan-to-value ratio (LVR) when you apply for a home loan, and if the amount you want to borrow would mean your LVR was very high (95% or more), you may be less likely to gain loan approval. If you can only save a deposit of, say, $50,000, but the amount you’d like to borrow is over $1 million, this would put your LVR at 95% (5% deposit). It’s likely that a lender would approve you for a smaller loan size instead, as there is a higher risk of default when a borrower has a smaller deposit.
Property value – The value of the property you want to buy will also factor into a lender’s determination of your borrowing capacity. If you’ve already saved up a deposit and want to make an offer for a home, the lender will generally value the property you’re interested in buying to better determine exactly how much they should lend you. This typically occurs during the settlement process, so may be more relevant if you’re an investor that has already gained pre-approval. You may also choose to independently hire a professional valuator for the purchase price before you sign on the dotted line.
How you can improve your borrowing power as an investor
If you’ve run the Borrowing Power Calculator assessment on yourself and do not believe you’ll be approved for the ballpark loan figure you need, you may be looking for options to boost your borrowing power.
There are a few options investors could consider before applying for a home loan to potentially boost the loan amount they could borrow:
- Increase your income – The more income you’re earning, the more that could be directed towards a mortgage. If you can take advantage of any side hustle opportunities, or speak to your boss about a pay rise, this could help bolster your borrowing capacity.
- Pay off your debts – Outstanding car loan or credit card bill weighing you down? Before you apply for a home loan it may be worth working to pay off your debts, so that more of your income will be able to be directed to your mortgage, and therefore you may increase your borrowing power.
- Reduce your expenses – Where possible, it may also help to reduce your ongoing expenses, such as your utilities bills and your phone bill. Shop around and compare your options, as switching to more affordable plans could help improve your borrowing power.
That being said, it’s important you avoid borrowing more than you can reasonably service. Lenders have serviceability tests in place to assess this internally, but if you’re in a rising interest rate environment, you may find that your mortgage repayments increase and put pressure on your budget. Consider the aforementioned rule of thumb to avoid mortgage stress, and try to avoid spending more than 30% of your pre-tax income towards your home loan repayments – if possible.
Finding a competitive investor home loan
Unfortunately, just by being an investor it’s more likely that a lender will see you as a ‘riskier’ borrower and be more inclined to offer you a higher interest rate. The interest rates offered to owner-occupiers are typically lower than those offered to investors because of this.
Put simply, lenders perceive a household living in a home as more likely to work to service loan repayments than an investor renting it out. Especially as investors are contending with unique risk factors, like falling property prices, market downturns and the threat of high vacancy rates, that could limit their rental income and ability to make interest repayments. Further, property investors may not stop at one investment type, and could be more likely to have additional assets, like property, in their portfolio with debts attached.
This is why it is crucial that investors compare home loan options before signing on the dotted line with their childhood bank, as there could be more competitive options available offering lower rates, fewer fees and greater features. The type of loan you may choose includes fixed rate or variable rate home loans, or consider a split rate loan for a ‘best of both worlds’ option.
Some investors also opt for interest-only home loans as an investment strategy to maximise their cash flow and reduce their ongoing expenses. This interest rate repayment type generally lasts for 1-5 years, after which your repayments will switch back to principal & interest, and you’ll likely have higher repayments to make. However, some investors who pay more in property costs than they gain in returns could experience some of the tax benefits of negative gearing, which makes investing so competitive in Australia.
Whichever interest rate type you choose for your investment property loan, be sure to compare fees and any features offered as well, to ensure you’re getting the best loan for your needs and budget.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.