Understanding your Financial Position Before Investing in Property

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By Lateral Partners

29-06-2022

Whether you are a homeowner looking to start your investment portfolio, or you are putting off home ownership and wanting to get on the ladder another way, there are multiple reasons for wanting to invest in property. Below we have outlined how you can assess your position and understand how feasible investment is in your current situation.

How much can I borrow?

This will be dependent on how much ‘equity’ you have and/or how much you have for a deposit on the property. Currently, the Reserve Bank requires investors to have an equity value of 40% in an existing property, or 20% if it is a new build property. This means the loan on the total value of your property/ properties can be no more than 60% – 80% of the total value.

The easiest way to assess your equity is to get an up to date valuation on any current properties. Your financial adviser/mortgage broker will be able to support this process. Need help? Get in touch with us here.

Can I use the equity in my owner occupied home or other investment properties?

Yes. If any of your properties have ‘usable equity’ you can use that portion of the value of your property as leverage against your new property. Your usable equity is calculated as the value in your property above 20% (the bank’s threshold for security) less your current loan (mortgage) amount.

If you are interested in getting a gage of how much useable equity you currently have, check out our handy usable equity calculator here.

Bank Assessment

Rental income will be assessed at 75 – 80% (of the total value of the rental income) when applying at main banks, which means you will not be able to account for the full rent you charge when calculating loan affordability for your new investment property. Depending on the chosen property and loan amount, there may be a requirement for a top up amount on top of rental income to service the loan.

Like an owner-occupied property, the bank’s assessment for servicing the loan will require qualifying your expenses and calculating your uncommitted monthly income, which is your remaining income after all expenses and loan payments. The criteria for this is subject to change so your Lateral Partners Advisor will be able to help you to understand your servicing ability.

Banks will also now measure your debt-to-income ratio when considering your ability to pay back a loan. This means that your debt cannot be at a factor that is a certain size of your annual income. For example, debt to income of 6x means your debt is limited to $600,000 if your annual income is $100,000.

Other Expenses

In addition to this, there are other expenses to consider that may not be covered by your rental income such as property management fees, solicitation fees, accountancy fees and any maintenance costs associated with the property.

For more information and real life examples of our mortgage calculator in use, download our free Property Investment Guide here.

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