The onset of the Global Financial Crisis has meant that borrowers now face significant hurdles in obtaining funding for property transactions. This new lending environment has seen Australia’s Big Four Banks tighten their purse strings, making it much more difficult for property investors to secure loans. Five hurdles stand out above all others with respect to property investment, however there are proven strategies for overcoming them.
1. Beating the loan to value ratio
The majority of Australian bank and non-bank lenders will demand a loan to value ratio of 80% for an investment property loan. This means that you will have to stump up a larger deposit in order to secure a loan. Lenders Mortgage Insurance (LMI) offers you the chance to purchase an investment property at a higher loan to value ratio of say 95%, however you can expect to pay thousands of dollars for LMI over the course of your loan.
2. Poor credit history
Recent changes to Australia’s credit reporting regime that took effect in 2014 have made it much easier to ruin your credit history. Every time you apply for an investment property loan, lenders will scrutinise your credit history. A poor credit history could mean that banks view you as a credit risk, leading to a higher interest rate on your loan. To overcome this, keep a very close eye on your credit card bills, in-store finance and personal loans. Also, assess your credit history annually and be sure to fix any discrepancies as they are identified.
3. Location, location, location
Choosing the right property will set you well on the way to achieving a higher LVR for your property. Lenders, like investors will be far more sympathetic if a property is close to public transport with a strong rental market and two bedrooms or more. Properties that are located in far-flung locations or are too small will not curry favour with lenders.
4. Diminishing rental returns
Finding the perfect property in the right location is only half the battle. Lenders are far less generous when it comes to considering the value of your rental income. If you’re applying for your third or fourth investment property loan then expect the banks to consider only as much as 75% of the value of rental income. The way to overcome this is to ensure that you are charging the full rate of rent for your existing properties through yearly reviews. It may also be possible to increase your disposable income to entice the banks further.
5. Fewer lending options available in the market
The number of small-scale lenders and diversified lending products (i.e. lo doc loans) active in the marketplace has dramatically fallen post-GFC. This has led to less competition and more stringent requirements among those that remain. Obtaining finance from fewer sources and product variations has allowed lenders – particularly banks – to only deal with investors with a proven track-record. To overcome this, it makes sense to engage the services of a financial specialist. Winquote specialises in helping self-employed individuals and SMEs secure the right loan for an investment property.