Q. Borrowing capacity
I'm very interested in buying my first home. I want to buy it and then rent it out. As the house will be for investment purposes only and not for me to live in, are the lending conditions and interest rates different? Also, I’m only 21 and I don't exactly earn that much (about $35,000 pa). How much I can borrow?
A. Years ago, interest rates and conditions on investment property loans differed to owner-occupier loans. Interest rates were slightly higher, and there were some restrictions on the lending criteria. As more competition came into the marketplace, investment loans came into line with owner occupier loans in terms of rate, features and flexibility.
Today, they are virtually identical. The only difference is that under an investment loan the borrower loses their protection under the Uniform Consumer Credit Code – something your lender will explain to you in more detail. When it comes to your ability to service a loan, you will need to consult a lender. Your current and future financial situation will need to be assessed in full. In most cases the lender will be able to include rental income for the property as part of your assessable income, and this will increase your borrowing capacity. It would be a good exercise to gather information about the lending process and what is needed for you to comfortably purchase your first home – even though that may be somewhere down the track.
Q. Loan structure
My wife and I are considering purchasing a property in Sydney, either as an investment property or to live in. Here are our financial details:
• $250,000 in savings
• income of $473,000+ for this financial year
• car loan of $546/mth
• credit card limits of $5000 and $3000
We have four investment properties but do not want to draw on any of the equity from them, because it has been a while since they were last valued. We estimate that we put $7000 a month into those investments. We are trying to find out how much we can borrow – our bank has suggested that if we want to borrow over $1,000,000 we will need a 30% deposit. If we were to live in the home we would be looking at an offset account, so that we can deposit our income (which fluctuates greatly) into it.
How much can we borrow? What's the best loan structure to go for?
A. Thank you for providing so much detail about your personal situation. This information really helps to build a picture of what you are trying to achieve. Having said that, more information would be needed before we could accurately assess and measure your borrowing capacity. To do that, we would need to view your tax returns and review your full assessment income and liabilities. The level of income you have indicated is quite high, but historical data (income from previous years) may have an effect on how much of that income can be used to calculate servicing. It is our estimation that you should be able to obtain a loan equal to 80% of the valuation of the property for loans up to $1.5m. But you may have to shop around, as not all lenders will be able to provide this level of borrowing.
Your approach and loan structure will vary depending on whether you choose to purchase an investment property or be owner occupiers. Should you choose the investment property option you may want to consider adding more than one property to your portfolio, given your financial position. The qualities you may look for in an owner-occupied property are likely to differ from those that a good investment option may possess.
As for offset accounts and loan structure generally, if you purchase an owner-occupied property you could choose either offset or redraw as a vehicle for extra payments. For investment properties, an offset account is certainly a better option.
Q. Buying with family
My brother and I are both interested in property investment, and we're considering pooling our resources and purchasing a property together. Can you give us an indication of the benefits or drawbacks of doing it this way? Will it cost more in legal fees or are they the same?
A. I am getting this question quite frequently at the moment, so I will provide you with some of the information I have given to our other readers.
The First Home Owner Boost has motivated many first-time buyers to purchase a house with friends. But it’s important to consider the implications of buying with family members. Without intending to discourage you, it’s important to understand what this means in the long term. Getting into the property market is an excellent way to create equity and build wealth, so the foundation that you build from needs to be strong and uncomplicated. The last thing you need is to embark on this long-term journey only to find out later that it’s just not working. But the good news is that most lenders cater for these types of arrangements, which makes it easy to keep each person's debt separate from the other.
It also allows each individual to pay the loan off at their own pace. If you are serious about this venture, you need to sit down and discuss all of the issues about the purchase with your brother. Some siblings buying together opt to engage legal representation to draw up an agreement which outlines every possible event, and the course of action that will be taken in each case. Do both of you want to live in the property as your primary residence? This can be more problematic than renting the property out. Personality clashes can arise, for example. Some things to consider include:
• What happens if one party cannot pay their loan?
• What happens if one party wants to sell?
• Who will maintain the property?
• Can one party buy the other out?
With this type of arrangement, most people tend to purchase the property as Tenants in Common.
Q. Non-resident loans
I have a friend that just received his Permanent Residency Visa and would like to purchase his first home. He currently has no income but his parents (overseas) are willing to provide half in cash but will need to take a loan for the other half. Is it possible to provide documentation of assets overseas to receive a loan, in order to prove his ability to make loan repayments?
A. This is a tough question, because more information is needed. But as a rule of thumb, if he receives income from these overseas assets and he can provide evidence by way of tax returns, then he could possibly look into a non-resident loan (even though he has received his Permanent Residency Visa). He would also have to show that his income is sufficient to support his total liabilities.
It would be a non-resident loan because his income originates from overseas. This is separate from his residential status.
My suggestion would be for your friend to meet with a lending specialist either on the phone or in person as soon as possible. This is because the loan arrangement could be complex, and advance knowledge of the details will assist in forward planning.