The numbers game in investment property

The Surf Coast has always been a popular spot for holiday home ownership, but as the township and infrastructure grows, so does the interest in the investment upside.

Here’s what to watch and consider in the existing environment from a borrowing perspective.

Interest-only loans

Interest-only borrowing has been the subject of a fair bit of media coverage and is in steep decline as a percentage of new loans. It’s always been a popular choice for investors, but the banks have become concerned about the ability for them to be paid back, at some point. Arguably, an investor will simply sell the property for a capital gain, but the banks don’t like being put in a position of forcing anyone out of a property. So new borrowers, or investors rolling off their current interest only terms, must be able to service a full principal and interest repayment schedule. New loans will typically be allowed to pay interest only for either five or 10 years, though.

Servicing the loan

Because “serviceability” is the number one focus of lenders now, proof of sufficient sustainable income to cover principal repayments at some point is key. Just don’t forget to include the rental income of the new investment.

Construction loans and timing

If there’s a period of construction, interest only will be charged during that time and future rental return can be used in determining borrowing capacity. But all incidentals to finalise the property need to be set aside to spend at the end of the build. In managing cashflow, the bank will use deposit funds for the initial stages, and then make payments after satisfactory completion of each contracted progress stage.

If the plan is to stay in an existing property while building, with a view to offloading the current property post completion, the bank will generally require the borrower to be able to service the total or “peak debt”. There’s some bridging or “go-between” exceptions, but the peak debt Loan to Value Ratio (LVR) will generally need to be under 80 per cent.

Property improvements and renovations

Where structural changes are being made to a property, be it a home or investment, it will fall under a construction loan, requiring a fixed price contract. Owner-builders generally need to be registered builders. They may also be required to stick to a building schedule, be subject to lower Loan to Value Ratios, and may have other restrictions imposed.

As always, research

is key to a successful investment With more than 25 years’ banking and financial services experience, Lanie Conquest runs Surfcoast Life & Lending to help local families & businesses make smart financing decisions.

Phone 0418 938 646 or email [email protected].