How To Finance An Investment Property

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Video Transcript

In order to purchase an Investment Property, there are two primary tests you must satisfy before lenders will consider your finance application. The first is the Equity Test, and the second is the Income Test.

The Equity Test

A) If you own a property, you will require between 20-30% equity in that property. Equity is the difference between the market value of the property and the amount you owe to your lender. This equity in property can be either an Owner/Occupier property or an Investment Property, and either residential or commercial property.

Example: Home Value - $400,000; Outstanding Loan - $300,000; Equity = $100,000 ($400,000-$300,000) or 25% of the property value.

OR

B) If you do not own your own property, you will require a cash deposit. You will require a minimum of $25,000 in cash or access to this cash amount; with the ability to save some additional funds to cover loan interest payments during the construction stage of the project.

If you have either the required equity OR the required amount of cash, you will pass the first test.

Please note that many lenders will allow an Equity Guarantor to gift this Equity or Cash for you. This could be a family member or a friend, or a Joint Venture partner for example.

The Income Test

To pass the Income Test, you will require a regular income. This could be from full time, part time or in some circumstances regular casual employment. Income could also be derived from your own business. As long as you have sufficient regular income that will make the investment loan affordable, you will pass the Income Test.

Most lenders will now allow you to use an Income Guarantor if you do not have sufficient regular income, depending upon your own personal circumstances. Like the Equity Test, this could be a family member or a friend, or a Joint Venture partner for example.

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