Securing a loan for an investment property can be very different from acquiring a home loan. In order for the investment to be successful, you need to decide exactly what you want to achieve – is this a short-term or long-term investment – and you need to be sure that you have all the funds required to make the investment work for you. Here are some of the issues you need to consider when you decide to start your property investment portfolio.

Calculate your borrowing power

Your borrowing power is calculated by comparing your current income with your financial commitments. Basically, the lender wants to know that you are a good risk and you can comfortably pay back a loan. The amount of deposit you have saved will also have an impact on your borrowing power, along with any equity you have in your own home. To work out how much equity you have in your home, subtract the amount owing on the mortgage from the total value of the property. For example, if your home is worth $700,000 and your mortgage is $400,000 then you have $300,000 in equity.

Allow for other costs

When you are working out how much you need to borrow, keep in mind that investment property loans have higher interest rates than home loans. If you are borrowing more than 80% of the property value, you will need to take out lenders mortgage insurance (LMI) to protect the lender in case you are unable to meet your loan obligations. Stamp duty is another expense you need to consider, which will be higher in an investment property than a residential property. Other expenses include legal fees, government fees and charges, bank fees, and establishment fees.

Calculate the investment value of the property

For the investment to be worthwhile, your investment property needs to draw in enough income to cover your loan repayments. Research the property carefully to ensure you can be confident it will generate enough rent to cover your costs, and that it has the potential to achieve your personal investment goals. Your lender will want to know how much rent you expect to receive, based on a market statement from a real estate agent. They will calculate for the property to be untenanted for some periods of time, so they will assess the potential rental income as somewhere around 50-75% less than what you would make if the property is tenanted all year round.

Choose the right loan

Depending on your investment goals, you will choose between a principal and interest loan or an interest-only loan. The principal and interest loan is the best option if you wish to build equity in the property, while the interest-only loan is a good option to minimize repayments if the property is providing long-term rental income.

A mortgage broker can help you decide on the right loan for your circumstances and investment goals.