A common misconception is that only millionaires can afford to buy investment properties. In reality, people with a relatively low income can still buy investment properties, but will just need to plan carefully and be creative when starting their portfolio. If you’ve got a low income but big property investment dreams, we’ve got some tips to help.
Low income earners will take longer to save for a deposit, meaning a loan is essential for buying an investment property. The tables are further turned against low income earners because some lenders will demand a higher deposit for investors than for owner-occupiers. Because of this, go for a loan that is investor-friendly and does not put up extra barriers between you and your ideal investment property. Alternatively, consider living in the property before converting it into an investment property, when you are better equipped to deal with the financial side of it.
A good guideline to bear in mind is having 10% of the property’s purchase price ready for your deposit, which will increase the likelihood of your loan being approved, increase your borrowing capacity and reduce the chance that you’ll have to pay lenders’ mortgage insurance.
Although you may feel your lower income could work against you, you can remedy this by proving that you are a low risk borrower. Demonstrating that you have healthy savings will show that you know how to manage your money, giving you the chance to increase your borrowing power and lower your existing debts.
Also, keep your credit card limits as low as you can, because lenders will use this to calculate your servicing, not using the balance. To further demonstrate your stability, try to pay off your personal or car loans before applying for an investment loan. Repaying your loans will improve your borrowing power, so it’s always best to pay it off before commencing the application process.
Low-income earners need to be tactical when choosing an investment property. For one, try to avoid anything that is negatively geared, because you do not need to offset a high income with losses, and remember to keep profit at the forefront of your mind. The location of your property will differ depending on whether you plan to invest in the short term or long term. Make sure to research the area and property thoroughly before committing.
If you do not have other non-deductible debt that you have to pay down first, adopt a principle and interest payment. Principle and interest payments can reduce debt, allow for more flexible borrowing capacity and provide you with leverage equity as opposed to interest-only loans which are best in specific circumstances.
Another creative idea is investing with a close friend or loved one, allowing you to combine your forces. Set clear agreements, such as who is responsible for the mortgage, what to do if one owner defaults, the property usage, how to sell it and how maintenance will be conducted. Co-ownership is a clever way of buying an investment property without having to go it alone.
Have you been rejected by a major lender? If so, you’re not alone. In fact, studies have shown that 60% of applicants who have been rejected by major banks are actually eligible for loans with a specialist lender. Recent changes to investor loans will have a significant effect on first time investors, especially those looking for interest-only loans.
Having Mel Finance on your side ensures you will get the most competitive investment home loan rate for yourself, which we determine by comparing over 30 lenders. Don’t just settle for the bank you bank with every day – speak to Mel Finance today!