Here's a handy guide to get you started on financing your property investment purchase.

1) How much do you need to get started?

For most residential real estate investments you can borrow to buy an investment property with a typical deposit (or surplus equity in another property) of 20% of the purchase price.

While you can borrow more than 80% with some lenders, you need to factor in higher interest rates, lenders mortgage insurance, and higher risks of larger mortgage payments.

• Stamp duty
• Settlement costs
• Conveyancing costs
• Bank fees
• Title transfer fees
• Other miscellaneous costs
• Any down time until rental income commences

2) Other sources of finance

3) Types of loans

Interest only - The borrower only pays the cost of annual interest on the loan each year and does not have to repay the principal until a later date.

Principal and interest - Paying a principal and interest loan means you are paying the current monthly interest due and progressively reducing the outstanding balance on the mortgage by also making principal repayments so that you are progressively paying off the mortgage. 

Revolving line of credit - A line of credit enables you to use generally up to 80% of your equity as collateral for further credit to make future purchases. It is an option chosen by real estate investorswho want the flexibility to top-up their mortgage to a pre-agreed amount without having to take out a separate mortgage each time.

Non-recourse financing - The borrower, in the event of failing to fulfill the terms of the loan, has their liability limited to the property the mortgage is secured against only and does not offer other asset security or personal guarantees.

Full doc loans - Requires the documentation of all income, assets and liabilities and is the most common type of mortgage loan used.

Low doc loans - Have less need for stringent income information than full doc loans, but still rely on a good deal of documentation to get approved.

Low start loans - Offers borrowers low establishment costs, a very low variable rate for the first 6 to 12 months and no monthly fees.

Refinancing - The process of re-financing or topping up or consolidating existing and/or new debt with the same or new lender/s. Always check the full cost of doing this and especially break fees on existing mortgages.

Deposit bonds - An alternative to a cash deposit for borrowers who have existing equity in property and want to use a bond/guarantee rather than a cash deposit. This is common when buying off the plan with a 12-24 month settlement as it avoids paying a (borrowed) cash deposit and then paying the interest in the money while it sits in trust awaiting project completion and settlement.

4) The loan approval process

Step 1 - Conditional and formal approval letters

If a loan application meets certain broad guidelines at the initial assessment stage, a lender or finance broker may approve the application in principle or indicate pre-approval.

As the application progresses, information provided by the potential borrower such as identification details, salary and overall financial situation is subsequently confirmed and credit check reports are received. The lender or broker will form an opinion of the applicant's ability to service a loan and a conditional approval letter will be issued if lending criteria are satisfied.

Step 2 - Approvals confirmation

Once all the necessary paperwork has been completed, it's normally only a short time before approval.

Make sure you read and understand everything before signing up. Keep your conveyancer or solicitor in the loop. Ask questions if there is any confusion - taking on a housing loan is the largest financial decision most people will make.

Step 3 - The bank valuation

A fundamental part of a property loan approval is confirmation by the lender that the valuation of a property being offered as security is sufficient to cover the loan.

Lenders will instruct a bank panel valuer to perform a market valuation and also consider what percentage of the purchase price is being financed and the risk profile of the loan taking into account other factors such as location and average time to sell.

Ready to get the ball rolling with your property investing?

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