Making the leap into property investment is equal parts exciting, daunting, and stressful. After all, a property portfolio is one of the most accessible wealth-creation vehicles in Australia. However, it can also be challenging to know how to get started the *right* way, that gets both the best result while avoiding painful, costly errors.
This means that many aspiring investors get ‘stuck’ before they even begin, and miss out on years of leveraged yield and growth.
Since 2009, we’ve helped more than 3000+ investors start, grow, or fix their property portfolios using carefully considered strategies and tactics. Whilst it’s important to recognize that every investor’s situation and journey is different, there are concepts that we frequently discuss and recommend to our clients.
And so in this week’s article, I’m going to explore three ways you can assemble a deposit for your first investment property, and five strategies for helping you increase your chances of being approved for your first IP loan. Please, use these strategies with care—and as always, reach out to us for a free, 30-minute Finance Strategy Session if you’d like help specific to your unique situation.
Three Ways To Generate A Deposit For Your First Investment Property
1. Use Savings
Our first deposit strategy is an obvious one: save consistently until you have an amount that satisfies “loan to value” requirements for your lender. Most lenders won’t give you any more than 88% (sometimes 80%) of the value of the property, which means you’ll need to save 12-20% in cash.
This strategy is ideal if you have a strong income with comparatively lower ongoing living expenses.
The downside to this strategy is that the time it takes to save a deposit—which might be 1, 2, 3, or even 5 years—will not insulate you against the increasing value of the property you wish to purchase.
For example, the property you wish to purchase may increase in value by 20% over three years, which means you need to save even more to satisfy LVR requirements… AND you missed out on ‘owing’ that growth, too.
This strategy may be the best for you have substantial savings already, and/or if you are able to save $3k+ per month.
2. Use Equity
This next strategy uses the equity in your own home as collateral for your deposit. This is one of the most common strategies amongst many new investors, as it doesn’t require significant cash savings.
There are multiple ways to use equity in your home to achieve this purpose. Depending on your situation and broader property accumulation plan, you may wish to cross-collateralise your current home (and stay with your current bank). Alternatively, you may wish to keep your investment property loan separate from your home loan provider.
If you are considering this strategy, please chat with us for more information. We often have to “fix” poorly ‘cross-collateralised’ loans for new clients… and we don’t want you to fall into this trap either. Investing in the correct strategy upfront will save you plenty of issues in the future.
3. Use Gifted Money
Using gifted money is another way to assemble a deposit. Gifted money may come via parents or family members, or via an inheritance.
However, simply ‘receiving money’ and providing it as a deposit may not be enough to satisfy lending requirements. You may need to present a saving or repayment history, and satisfy other requirements as listed below.
Being “Financially Responsible” — How To Prepare Your Finances To Satisfy Investment Property Lending Requirements
Generally speaking, it can be a little harder to satisfy the lending requirements for an investment property loan. This is because the investment property lending environment is regulated a little differently (and is bound by slightly different rules).
Here are some strategies to help you improve your chances of being approved for your IP loan:
1. Avoid missing debt repayments, or bill payments
This one is fairly obvious—lenders are going to check that you don’t have any outstanding debts, and that you pay your financial obligations on time. This includes credit card payments, loan payments, other liabilities, and bills too.
If you’re not sure if you have any credit defaults, you can check your credit file online at any time (in many cases, at no cost to you). A simple Google search will provide you with multiple credit history providers to choose from.
2. Create a consistent personal finance environment
Lenders are going to assess your ‘financial stability’ when they review your loan application. This means making sure that you have a stable, regular income, and that you have lived in one place for a considerable amount of time (and don’t move homes too often).
3. Live within your means, and don’t purchase unusual (or ‘financially irresponsible’) items
Lenders are also going to assess your broader ‘financial responsibility’ when they assess your application. This means they’ll review your recent transaction history and check for:
- Large, unusual purchases that don’t match your usual spending habits
- Financial activity that may indicate poor financial literacy (eg. frequent visits to gambling venues)
Lenders are also obliged to ensure that the loan repayments you’ll need to make won’t be too much of a burden on your current income level–so you’ll need to demonstrate that you can satisfy this requirement, too.
4. Keep personal debt low
Personal debt like credit cards, micropay apps, and vehicle finance can reduce the amount of money you can borrow. You may want to reduce credit card limits and/or consolidate personal debt before applying for your IP mortgage.
5. Consider Pre-Approval
Pre-approval is a great way to enter the property buying process with confidence. With pre-approval up your sleeve, you can also create more attractive purchase offers (eg. with faster finance turnaround times). To arrange pre-approval for your investment property loan, get started by requesting a Strategy Session with one of our experienced brokers.
Get Started By Requesting A Strategy Session
If you’re not sure how to get started as a property investor, or you’d like to discuss pre-approval for your first investment property loan, request a Free 30-Minute Finance Strategy Session during which you will…
- Gain greater clarity over where you want to be in terms of owning investment properties (and how to structure your loans to get there the fastest, safest way)
- Discover how to unlock the equity in your current properties, so you can build your portfolio – and your wealth – faster (and enjoy a better lifestyle now and in retirement)
- Discover clever, no-cost ways to save money on interest, fees, and charges — immediately
- Get an up-to-date picture of the lending landscape including rates, conditions, and how to structure loans for cashflow positive investors
- Learn about our process to find you a better loan that will save you thousands.
This no-obligation session will be held with one of our experienced mortgage brokers.
Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.
Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)