Is it harder now to get an investment loan than it was in the past? Maybe! But with these tips, you’ll improve your chances of getting one.
There are all sorts of forces in play when you’re applying for an investment loan.
Lenders obviously take your circumstances into account. If you don’t meet their criteria, you’re not going to get a loan.
But there are external factors at play too. These factors may lead to lenders restricting their access to investment loans, even to those who are in good financial positions.
The good news is that you can overcome these forces. But you need to know what they are before you apply.
The APRA’s Investment Loan Changes
The APRA’s regulations are enough to send a chill down an investor’s spine. Over the last few years, it seems like their main focus has been to restrict investor access to loans.
You’ve had to contend with a host of market caps.
Perhaps the most significant of these was the APRA’s 30% cap. This mandated that lenders could only allow investment loans to make up 30% of their total loan offering.
Once they hit the cap, the loans dry up. And that was a problem for you. There was no real way to tell if the lender had hit their cap beyond them withdrawing their investment loan offerings.
Why did the APRA put such an investment-opposed policy in place?
They state that they had two aims:
- Moderate the high-risk lending that some lenders fell into.
- Strengthen lending standards across the entire industry.
There’s also a suggestion that the APRA wanted to cool the property market, especially in the major cities.
We’ve certainly seen that cooling take place in 2018.
But there’s some good news as we head into 2019.
The APRA has decided that its regulations have served their purpose. They were always intended to be temporary. And as of 1st January 2019, the 30% cap is no more.
So, does that make it easier for you to get an investment loan?
Not necessarily. Lenders still have tighter criteria than before so you might find yourself struggling.
That’s where these tips come in. Follow them to improve your chances of getting your application approved.
Tip #1 – Find a Good Mortgage Broker
A mortgage broker may be one of the most valuable tools in your efforts to get an investment loan.
Here’s what they do.
Brokers handle a lot of the research legwork for you. They look at each lender’s offerings and boil them down to the best loans to suit your circumstances. They also often have industry contacts that you don’t have access to.
This means that they may have access to investment loans that you wouldn’t find on your own.
A broker can also advise you on the best course of action to take. Such was the case for Lauren:
A physiotherapist by trade, Lauren wanted to get started as a property investor. She has a $90,000 per year salary and had saved up a few thousand dollars for a deposit.
She went to a mortgage broker to get some advice.
The broker identified a couple of issues. The first was that Lauren was due to start a new job. If she applied for a loan during this process, she’d likely get refused. And that would make later applications more difficult.
Lauren’s broker helped her avoid this problem.
The broker also pointed out that Lauren didn’t have a high enough deposit. That meant she’d end up paying Lender’s Mortgage Insurance (LMI).
This could have added thousands to her loan. The broker resolved this by finding a lender who would allow one of Lauren’s family members to act as a guarantor.
This case study highlights what a mortgage broker can do for you.
They’ll advise you on when, how, and who to apply with based on your circumstances. Plus, they can come up with solutions to potential issues for you.
All of that on top of being able to find suitable loan packages.
Tip #2 – Consider Principal and Interest Over Interest-Only
The APRA’s regulations have led to a changing perception about interest-only loans.
Previously, investors used these loans to lower their initial outgoings when buying a property. They’d only pay interest on their loan for a couple of years. This allowed them to secure cash flow ready for the principal and interest (P&I) payments that came later.
The problem is that this is a risky strategy, at least from a lender’s perspective.
You may find that some lenders won’t make an interest-only loan available. Or, they may set really tight criteria that makes it difficult for you to access this type of loan.
It may be a better move to pay principal and interest from day one.
However, this depends on the lender.
For some, this move will improve your serviceability. That means they’re more confident in you, which increases your chances of getting the loan.
You may even find that the interest rate is lower.
But for others, you may have the opposite effect. Some lenders take your other loans into account, as well as any existing mortgages. Going P&I may make you less serviceable if you already have a lot of debts.
It’s going to depend on your circumstances.
If you’re struggling to get an interest-only loan, look into a P&I loan instead.
Tip #3 – Be Realistic About Your Borrowing
It’s tempting to go for the highest amount possible when borrowing money for an investment property.
More money means access to a wider range of properties.
But borrowing more also makes you more of a risk to lenders.
This is one of the problems that Arnold and Selina ran into.
Arnold and Selina wanted to borrow money to buy a property in a Victoria suburb. The median property value in the location was $782,000.
That raised some problems. Combined, the couple had an income of $130,000. But Selina was in the probationary period of a new job after not having had a job for the five months prior.
They also need a loan that offered a loan-to-value ratio (LVR) of 95%.
Unfortunately, this meant that securing over $780,000 would prove very difficult.
The couple worked with a mortgage broker to get a more realistic picture of what they could borrow.
In the end, they lowered their expectations and borrowed $480,000. Lenders felt more comfortable with the lower figure. Plus, the couple can always look for larger loans once Selina settles in her job.
In Arnold and Selina’s case, they may have been able to access the $780,000 they originally wanted.
But with a 95% LVR, they’d have had to pay a lot of money in LMI. Plus, their lenders would have asked them to meet much tighter criteria.
Sometimes, going for a little less than the maximum that you can get will help you to secure your investment loan.
There are plenty of things that you can do to increase your chances of getting an investment loan.
Tempering your expectations may help. Applying for a little less than the maximum improves lender confidence and means you’re not as much of a risk to them.
You may also find that applying for a P&I loan is a better solution.
But beware here. Each lender sees things differently.
Finally, working with a mortgage broker will help you gain access to a wider variety of loans. Some of these may come from specialty lenders that you may not have found on your own.
The key is that your loan serves your investment strategy.
And that’s where Wealth for Life comes in.
We’re all investors ourselves and we can help you to build a solid strategy. Plus, we can provide you with access to mortgage brokers.
Just get in touch to arrange your FREE one-to-one session.
Or contact us directly if you have any questions.