***IMPORTANT INFORMATION - The Reserve Bank has temporarily removed the LVR restrictions. That means you can buy a rental with 20% deposit. The equity calculations below are still relevant, but we would swap out the 30% with 20%. So you can leverage to 80% of your owner occupied property (less existing lending) to create a 20% deposit on a new rental. Or a stand alone rental would require a 20% deposit.
Thinking about property investment? With the property market growing significantly in the last few years and interest rates steadily dropping, now is a great time for people to use their growing equity to buy a rental property.
We often see customers who are in a position to invest in rental property but haven't taken that first step yet. We can help you get started with your first property investment, or maybe you are already an investor. We understand the unique challenges of property investment and with our expertise can help you achieve your property goals and build your investment portfolio.
What is your investment strategy?
We recommend getting clear on your investment goals first — are you looking for high capital growth properties with lower return, or cheaper houses in less desirable suburbs with a higher return on rent?
It's important you manage your property investment like a business, even if you are planning on only buying one property. Aim to have a set-up that allows you to pay it off quickly with the help of a regular rental income.
Make sure you understand the financial commitments of owning a rental property. Budget for all the relevant property expenses like rates, insurance, mortgage interest, any body corporate fees and property management fees. Is the rental income going to cover all of this, or will you need to top it up from your own income?
The bank will only use a percentage of the rental income — usually 75% —in their loan servicing calculator. This is to allow for breaks in income between tenancies, and property expenses. The bank will need to see that you have enough surplus income to cover any deficit.
Ideally you should aim for your return on the property to be more than the mortgage rate. You can work out the gross return on a property by taking the weekly rent and multiplying it by 52 weeks to get an annual income. Multiply the annual income by 100 and then divide that figure by the purchase price. This percentage is your gross return. For example:
- A property was purchased for $500,000
- The weekly rent is $450
- $450 x 52 weeks = $23,400 annual income
- $23,400 x 100 then divided by purchase price of $500,000 = 4.68% return
Leveraging off your own home
Reserve Bank restrictions say you need to have at least a 30% deposit for a rental property that’s an existing house. For rental properties that are new builds it may be possible with a 20% deposit.
If you have good equity in your own home, you may not need a cash deposit to buy the rental.
Here is an example of how it works when buying a rental that is an existing house (or watch our video below which also explains):
- Your own house is worth $550,000 and you have a $260,000 mortgage.
- The most you can borrow against your owner-occupied property to create a 30% deposit/equity in a rental is 80%.
- 80% of $550,000, is $440,000
- Take away from that your existing mortgage of $260,000 which leaves you with $180,000 of equity to recycle as a 30% deposit.
- $180,000 is 30% of $600,000. You calculate this by taking $180,000 and dividing it by 0.30
- That means you could 100% finance a rental to $600,000 with lending to 80% of your owner occupied and 70% of the rental. The maximum guidelines set down by the Reserve Bank.
A different example could be:
- You own a home worth $550,000 with no mortgage on it
- You could borrow up to 80% of your home's value
- That's $440,000 cash outright to buy a rental property.
Just remember you will still need to meet the banks’ servicing guidelines, but the above scenarios give you an idea of how to work out your equity position.
There are also other options with some non-bank lenders that may allow a loan-to-value ratio higher than 70% on a rental property. You would need to discuss your situation with us first to see if this would be a suitable option for you.
Talk to the experts
We recommend talking to your mortgage broker first to discuss your personal situation. The lending environment is complex, and you may not exactly fit the examples above, but whatever your situation we can look at what the options might be, help you with your investment strategy, and ensure you get a lending structure in place that is going to work for you.
Contact us to talk about your options.