How much can I borrow for an investment property?

If you’re thinking about buying an investment property, one of the first questions you’ll probably ask is: how much can I borrow?

The answer isn’t based on your income alone. Lenders look at your overall financial position, including your existing debts, expenses, available deposit or equity and the expected rental income from the property.

Two people earning the same income can end up with very different borrowing capacities, depending on how the rest of their finances are structured.

What affects your investment property borrowing capacity?

Your income

Lenders will generally consider income from sources such as:

• PAYG employment

• Self-employed income

• Overtime, allowances, bonuses and commission

• Existing rental income

• The expected rent from the new investment property

• Some government payments and other ongoing income

Each lender has its own rules around what income it will accept and how much of it can be used.

For example, a lender may not use all of the expected rental income because they need to allow for property expenses and periods when the property may be vacant.

This is one reason borrowing capacity can vary considerably between lenders.

Your existing debts and credit limits

Your current commitments will also affect how much you can borrow.

These may include:

• Your existing home loan

• Investment loans

• Car loans and personal loans

• HECS or HELP debt

• Credit cards

• Buy now, pay later accounts

• Child support or other ongoing commitments

With credit cards, lenders generally assess the limit rather than the amount currently owing. A card with a $15,000 limit can therefore reduce your borrowing capacity even if the balance is paid in full each month.

Reducing unnecessary limits or repaying personal debts may improve your position, but it’s worth checking the figures before making any changes.

Your household expenses

Lenders review your regular living expenses as part of the assessment.

This includes costs such as groceries, utilities, insurance, transport, education, childcare, subscriptions and other household spending.

They also apply minimum expense benchmarks based on your household circumstances. If your declared expenses are below the relevant benchmark, the lender may use the higher benchmark figure when calculating your borrowing capacity.

Your deposit or available equity

Borrowing capacity tells you how much debt you may be able to service. It doesn’t automatically tell you how much you can spend on a property.

You’ll also need enough funds to cover your contribution and purchasing costs, which may include:

• The deposit

• Transfer duty

• Conveyancing and legal fees

• Building and pest inspections

• Loan costs

• A financial buffer for unexpected expenses

• Lenders mortgage insurance, if applicable

If you already own a home or another investment property, you may be able to use some of its available equity towards the deposit and costs.

Usable equity is not always the same as the total difference between your property value and current loan balance. The amount available will depend on the property valuation, the lender’s maximum loan-to-value ratio and whether you can service the additional lending.

Lenders assess your ability to repay at a higher rate

A lender doesn’t assess the loan using the advertised interest rate alone. It applies a higher assessment rate to make sure you could continue meeting the repayments if interest rates increased.

This can make the borrowing capacity shown by an online calculator look different from the amount a lender is prepared to approve.

Existing home and investment loans may also be assessed using higher repayments than you’re currently making.

The property can affect the loan

The type of investment property you intend to buy may also influence the lender’s decision.

Some lenders have additional requirements for:

• Small apartments

• High-density developments

• Serviced apartments

• Student accommodation

• Rural or regional properties

• Properties requiring substantial repairs

• Short-term rental properties

Before signing a contract, it’s important to check that both your financial position and the property itself meet the proposed lender’s requirements.

Borrowing capacity and a comfortable budget aren’t the same thing

A lender may approve a certain amount, but that doesn’t mean borrowing the maximum will suit your plans or budget.

An investment property comes with expenses beyond the loan repayment, including rates, insurance, property management, maintenance and periods without a tenant.

It’s worth allowing some breathing room rather than basing the purchase entirely on the maximum amount available.

Tax benefits may form part of your investment strategy, but an investment that makes a loss still requires you to cover that shortfall from your other income. You should speak with your accountant or financial adviser about the tax and investment aspects of the purchase.

Why lender choice matters

Investment lending policies vary widely.

One lender may take a more favourable approach to rental income, overtime, existing debts or the way your current loans are assessed. Another may offer a lower interest rate but provide significantly less borrowing capacity.

The best option is not always the lender with the lowest advertised rate. It’s the lender whose policy, borrowing capacity and loan structure suit your circumstances.

Planning an investment property purchase?

If you’re considering an investment property in Brisbane, elsewhere in Queensland or interstate, I can assess your borrowing capacity and work through:

• Your estimated maximum loan amount

• Your available deposit or usable equity

• The purchasing costs you need to allow for

• Different lender policies

• Your expected repayments

• A loan structure suited to your plans

A clear assessment before you start making offers can help you set a realistic budget and avoid wasting time looking at properties that don’t fit your finance position.

Book a free 15-minute strategy call and we can work through where you currently stand.

This information is general in nature and does not take into account your personal objectives, financial situation or needs. Consider obtaining independent financial, tax and legal advice before purchasing an investment property.