There is no sugarcoating the fact that if you are a low-income earner, buying investment property will require a lot of discipline and sacrifice.
There are a number of challenges to overcome, but although income level is a factor when it comes to borrowing money for investment, there are a lot of other aspects at play, many within your control.
Investing in property remains one of the most effective ways for those on average or lower-than-average fixed incomes to build wealth, so there is every reason to research and dare to dream.
With discipline and planning, those earning a relatively low income can position themselves as a candidate to qualify for an investment loan by paying attention to their credit rating, saving for a deposit and searching for the right investment property.
In a nutshell, your credit rating is about how you demonstrate a healthy degree of financial discipline over a number of years.
Today, all major lenders have access to virtually everyone’s credit history, and although each apply slightly different criteria, most will consider the following factors:
- Stability of employment history
- Regularity of deposits into savings or transaction accounts
- Level of existing liabilities or debts, including credit cards
- Paying bills on time and in full.
The better you perform in these areas over an extended time, the more likely you are to qualify for a loan.
Saving for a deposit
It’s easy to say; harder to achieve, but saving 5-10% of the property value for your deposit will increase your level of suitability to the lender. The act of saving a deposit also proves to the lender that you have the discipline to service a loan.
To avoid paying lenders’ mortgage insurance (LMI), an investor typically needs 20% deposit, plus enough money to cover up-front costs of stamp duty, legal fees and other government charges.
If the prospect of saving a 20% deposit is inconceivable, you can consider other methods to avoid LMI (which usually costs between .5 and 1% of the loan amount), such as approaching a family of friend to be a guarantor to help you complete the deposit.
Guarantee loans allows another person, usually a family member, to use the equity in their own home as additional security for a portion of your loan amount, and are available from several banks and lenders.
Type of investment property
By finding the right type of property, an investor can also increase their chances of qualifying for a loan. Lenders are more likely to lend money on a property located in an area of predicted capital growth, good buyer sentiment and demand, showing higher than average rental yield, and of course, at a good price.
The good news is that the lender will also take estimated rental income that would be generated from the investment property into account when estimating your borrowing capacity. If the property has a relatively high yield, such as 3-5%, then this boosts your ability to service the loan.
If you’re investing in property to generate wealth, you should consult a range of professionals including an accountant, financial planner, a local mortgage broker and agents.
Low-income earners face a daunting task when it comes to entering the investment property arena, but every long journey began with taking the first step, and many of reached their goals.