Investing on a low income
Find an investor-friendly loan
One of the challenges facing many first time purchasers is saving for a deposit whether it be an investment or a home to live in. When purchasing an investment though some banks won’t allow you to borrow as high of a percentage of the purchase price as you would be able to for a home to live in. To combat this you can save a larger deposit or alternatively you can live in the home to begin with and then change it to an investment property once the Loan-To-Value Ratio (percentage of your home’s value that you borrowed on your mortgage) has lowered. In NSW this has an added benefit as provided the property meets First Home Buyer grant conditions you can use those also to help you secure your first property. The larger the deposit, the better as this will lower your monthly repayments as well as make yourself more appealing to a bank when they decide whether or not to lend you money.
Prove your financial discipline
Your lower income on an application can be offset by proving yourself a low risk borrower. Having genuine savings will not only highlight to lenders your ability to consistently meet financial payments and live within your means, it is also an opportunity to increase your borrowing power. Lowering any existing debts, including credit cards, personal loans and store cards is also a great way of improving your chances of accessing credit.
When a lender assesses a credit application they always assess on the limit of a credit card not how much is owing. By completely erasing this you have increased the amount you can borrow. In the case of personal loans, lenders will use the repayment figure in their calculation. By clearing any personal loans also helps increase your borrowing power.
Choose the right property
When considering properties to purchase it is important to factor in the amount of rent the property will earn as this will help improve your application to the bank and add to the amount of money you have available to make repayments on a loan.
One of the advantages of owning an investment property is being able to offset any expenses against your income and while this is a helpful, if you focus too much on lowering your tax bill it
will hurt your chances of being able to buy a property as you will have less money available to make mortgage repayments.
Seek out different strategies
Investing with a close friend or relative is another way to enter the market for those who earn a low income. As long as agreements are in place, including who is responsible for the mortgage and what happens if one owner defaults, how the property will be used, in what circumstances it may be sold, and how maintenance will be paid for, co-ownership is preferable to not owning a property at all.
Find the right loan
Recent research suggests that as many as 60 per cent of applicants who are rejected by the major banks would be eligible for a loan through a specialist lender. Specialist or non-conforming loans do carry higher interest as a rule, to account for the higher perceived risk the lender is taking, but a good finance broker will see this type of loan as a stepping-stone to a prime loan, and help their client prove themselves so that they can switch to a prime loan after a year or so.
Property investment may not be as straightforward to low-income earners, but in most cases is accessible, provided the right properties and finance products are sought out.