When lenders look at finance applications, they are differences in their approach depending on whether the potential buyer is looking to purchase an investment property versus buying a property to live in.
One of the most tried and tested ways to get into the property market as an investor is buying as an owner-occupier and turning that property into an investment.
The advantages of doing this are that the barriers to entry into your first property are far lower.
Advantages of Buying as an Owner Occupier
The first significant advantage of buying as an owner-occupier is that you can possibly be eligible to pay low or no stamp duty.
Stamp duty is typically 4-5% of the purchase price and can be a massive barrier to entry for new homebuyers.
In most cases, it is possible to get the First Homeowners Grant. If you meet specific requirements, you can claim a first home concession for transfer duty when acquiring your first residence.
However, there are some requirements regarding this scheme that differ from state to state within Australia. Check on your local government website for more information.
The other big-ticket issue for property buyers is Lenders Mortgage Insurance (LMI).
LMI is a one-off, upfront premium that is put in place to protect the lender on higher LVR loans (above 80%).
LMI applies to loans where the purchaser wishes to take out a loan with less than a 20% deposit saved. This fee is quite costly and can often be in the tens of thousands of dollars.
A way to avoid this is to use a guarantor loan, which in most cases involves parents, who effectively put up equity in their own home so that you can use it as a deposit.
In some cases, it is possible to get a 100% loan, meaning no money is deposited. However, these are pretty rare as they are considered to be a much higher risk to lenders.
Similarly, there are also Government-backed programs (FHLDS) that allow you to borrow up to 95% of the property’s value. The Government will effectively make up that deposit shortfall, and you won’t need to pay LMI.
In most cases, to access these loans and incentives, you will be required to stay in your home as an owner-occupier for 12 months after purchasing the property. After which, you can move out and rent out the property as an investment.
If you purchase in a high-growth area, then you might even be able to see an equity uplift that you can then access to use to buy your next property.
Another common way to buy a property with little to no deposit saved is to partner with someone who does. This is not exclusive to romantic partners; it may include a parent, sibling, other family members, or friend.
Typically, there are two elements that you need to buy a property. Cash and borrowing capacity.
If you have a job or regular income and little debt and low expenses, you might be a good candidate for a loan from a bank.
By partnering with another party that brings the cash component, it is possible to buy a property that you might not have been able to have done by yourself.
Obviously, buying an investment property with someone else is not always practical, depending on the relationship. However, this type of deal happens frequently in small developments and even renovations intended to be sold.
When you buy a property, lenders look at your savings, as well as how much you can afford to borrow based on your income and expenses.
Lenders like to see savings as it suggests you are someone who manages money well. However, each lender analyses these savings differently.
Some lenders might consider those genuine savings if you were to take out a personal loan large enough to cover stamp duty and a deposit and leave that money sitting in your account for three months.
Assuming you can service what would effectively be a 105% LVR, this could be a strategy that could work for people in some circumstances.
It’s possible to buy apartments or homes off the plan, and because the property is not going to be built for some time, you might only need to pay the initial deposit upfront.
While this is typically something like 10%, this will still be lower than other property investments. Stamp duty can be delayed (or exempt) in some cases, but it’s essential to check on a state-by-state level.
You can then potentially borrow against the property before it’s finished to fund the down payment should the market rise.
This strategy relies on the fact that the property itself will increase in value, which often requires a hot market. If you can’t settle on the property when the time comes, you could very well be liable for any losses incurred by the developer.
This is probably not a strategy recommended to many investors and would be at the very high-risk end of the scale.