Three reasons to consider investing in property

Three reasons to consider investing in property

Property investment has been a hot topic in recent years. The current trend is seeing many Australians talking about investing in property, with many already looking at investment home loan options.

Recent figures from Roy Morgan reveal that, among home loans, investment property loans have grown by 37 percent over the last four years. By contrast, the number of owner-occupied loans grew by a much smaller 4 percent in this same period. 

Perhaps you’re champing at the bit to get in on the action yourself. But before you do, be sure you know why you want to do it and what you are hoping to get out of it.

You can earn a return in different ways

The most common way that people think about property investment is that you buy a house, let it sit, and some years later if home prices in the area have risen, then you’re due to sell it for a potential profit. This is what’s known as capital gains. But it’s not the only way to get a return on your investment. You can also start renting your new acquisition out to tenants and charge them rent, which could help cover the costs of insurance, mortgage repayments and basic maintenance – or if you’re lucky, even provide you with some extra cash in your pocket each week.

Alternatively, if you’ve got a mind for business, commercial property investment is another avenue that can be explored. While it is not as well-known as residential property investment, with a bit of knowledge and guidance, you could find yourself successfully adding an office, retail outlet or industrial property to your investment portfolio. There are plenty of real estate agents who specialise in commercial property, and even some online commercial property platforms, such as Corporaterealestate.com, who will help you buy, sell, manage and find tenants for your new commerical investment.

You obtain a valuable asset

Saving enough money for retirement can be a difficult thing to do. But one avenue that some people choose to take is buying a property – for residential or investment purposes. When you buy a home, you’ll be making payments to your mortgage each week or month. As a result of doing this, you’ll build up equity in your loan over your life and gradually pay it off altogether. Once this is all done and dusted, you can own your home outright, giving you the power to sell it in the future and put the funds toward retirement. 

Industry Communications Director of Roy Morgan Research Norman Morris noted that government policy towards retirees could be significant in pushing individuals to consider this option.

“Older Australians will face the prospect of cuts to pensions, and with the proposal for the pension age being increased to 70, this could impact the investment property market,” he said.

You have some control over the process

Unlike with other investments, you as the investor have some agency in whether or not your property might see growth in value. By keeping the property maintained, along with making improvements and additions – perhaps a new paint job, a more tidy yard or some modern appliances – you could help drive up its value. If you wanted to be bolder, adding features like a garage or extra bedroom can potentially have an even more significant impact on the price.

Certainly, there are risks with property as there are with any investment. It is not a “liquid” investment, as it’s not possible to withdraw it quickly. And there’s always the chance you could be left selling the property at a disadvantageous time or spending too much to hold onto it. You’ll have to weigh up whether the costs and benefits are suitable for both your overall goals and your financial circumstances.

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Learn more about home loans

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What does pre-approval' mean?

Pre-approval for a home loan is an agreement between you and your lender that, subject to certain conditions, you will be able to borrow a set amount when you find the property you want to buy. This approach is useful if you are in the early stages of surveying the property market and need to know how much money you can spend to help guide your search.

It is also useful when you are heading into an auction and want to be able to bid with confidence. Once you have found the property you want to buy you will need to receive formal approval from your bank.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

What is appraised value?

An estimation of a property’s value before beginning the mortgage approval process. An appraiser (or valuer) is an expert who estimates the value of a property. The lender generally selects the appraiser or valuer before sanctioning the loan.

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

What is stamp duty?

Stamp duty is the tax that must be paid when purchasing a property in Australia.

It is calculated by the state government based on the selling price of the property. These charges may differ for first homebuyers. You can calculate the stamp duty for your property using our stamp duty calculator.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.