Whether you’re thinking about your first property investment or your next one, there are many important things to consider given how complex buying property can be.
Prospective property investors need to thoroughly research their market and all their options before making an informed decision. Here are a few factors to consider along the way, to help you buy with confidence.
Using equity for your deposit
To help work out a price range for your search, start by thinking about how much you’re comfortable repaying and putting down as a deposit. Take the time to factor in your everyday living expenses, existing debts, financial commitments, and realistic rental income and expenses.
Generally, you’ll need 20% of the property's value (which is determined by the bank’s valuation of the property) as your deposit, to avoid paying Lenders Mortgage Insurance (LMI). Try using our Stamp Duty and LMI calculator which will help you estimate how much stamp duty and LMI you may have to pay when buying a property. If you don’t have a 20% deposit, there are other low-deposit options that could help you buy a place sooner.
Many investors use the ‘equity’ in their existing property to help buy their next one. A borrower’s usable equity is up to 80% of their property’s current market value, minus what is owed on the mortgage. You can estimate your usable equity using our equity calculator.
Please consider that you may be required to refinance your home loan to understand its current market value*, if using equity becomes a viable option for your financial position.
Knowing your strategy
When planning your investment strategy, it’s important to understand there are many different areas of potential such as; capital growth, rental income and tax. The right choice for you will often depend on personal circumstances and investment goals.
First, let’s look at capital growth. As a buyer, you’ll want your property’s market value to rise. But with markets and demand rising and falling over time it’s never a guarantee, and you’ll still need to cover your home loan even if your property’s value goes up.
Then there’s your ongoing rental income stream. ‘Gross rental yield’ is the amount of rent you can receive in one year, measured against the market value of the property. It’s commonly used to compare properties with different values and rental returns. For a more accurate rental return, you’ll also need to factor in net rental yield: the money left from your gross rental yield after paying all your investment’s fees and expenses. These can include council rates, strata fees, management fees and general upkeep.
The third area is tax. As the rules change constantly, we recommend you get bespoke advice from your accountant about whether your property is negatively or positively geared and what the outcome means specific to your situation.
Additionally, you can visit the Australian Taxation Office (ATO) website to find out what you can and can’t claim on a rental property.
Here are a few expense examples according to the ATO that you could claim as a tax deduction:
- Advertising for tenants
- Body corporate fees and charges
- Council rates
- Water charges
- Insurance (building, contents, public liability)
- Interest on your investment loan
Finally, if you eventually sell, you need to report capital gains and losses in your income tax return and pay tax on your capital gains. Although it’s referred to as capital gains tax (CGT), this is actually part of your income tax, not a separate tax. Ask your accountant for advice or read more from the Australian Taxation Office.
As rules around tax deduction often change, ask your tax accountant for advice or visit the Australian Taxation Office website at ato.gov.au
Choosing your loan
Like regular loans, property investment loans offer choices like repayment structure and fixed or variable rates.
A variable rate moves up and down in response to market interest rates, but as there’s no fixed term, you’ll generally get the flexibility to make additional repayments saving you interest and redraw funds you have paid above your minimum repayment. Plus, if you have a 100% offset transaction account linked to your Investment loan, every dollar in that account will count to ‘offset’ your daily home loan interest, while still letting you access your money when you need it.
You can get the best of both worlds, by splitting your Westpac home loan balance into 2 accounts – one with a fixed rate and one with a variable rate. This let’s you take advantage of both the flexibility of a variable rate loan and the repayment certainty that comes with a fixed rate loan.
There are two types of repayments. ‘Principal & Interest’ repayments cover your principal (the amount borrowed), plus interest on the outstanding principal, fees and government charges.
An ‘Interest Only’ repayment just covers interest on the principal you’ve borrowed, plus fees and government charges - so you won’t be paying off any principal. During your Interest Only term, which could be up to 10 years in length, your monthly repayments will be temporarily lower than principal & interest repayments, but your loan amount won’t reduce (as you are not paying down your loan), and your interest rate may be higher.
Investment due diligence is always key when making a purchase, so it’s worth considering:
- Having a longer-term strategy to ride out the highs and lows of the property market.
- Researching which markets and areas are yet to peak and which suburbs might have long-term demand.
- Focus on realistic purchases that work for you and your financial circumstances, compared to purchases edging towards the higher end of your position which could be harder to manage long term should the market or your financial circumstances change.
- Investing with a larger deposit so you have a ‘buffer’ should property values and rental incomes decline. This can minimise the chance of both a negative cash-flow and negative equity situation.
- Taking advantage of low interest rates, by fixing all or a percentage of your loan, giving you certainty over what your repayments will be. Westpac are offering Fixed Rate Investment loans for 1-5 years – with a handy redraw facility to access excess funds from your loan at no extra cost up to a maximum total of $30,000 over the life of a new loan.
- Finding a good property manager if you don’t have time to manage it yourself. Look to engage leasing experts at least 4 weeks before settlement. Check reviews, compare pricing and find out how they’ll market and maintain your property, make repairs and collect rent. Remember: it’s essential you secure quality tenants, or you risk having your property sitting vacant.
Things you should know
Westpac is not responsible for the content of any third-party website to which links are provided from this article. Westpac does not endorse or control these third-party websites and is not responsible for any products or services taken up with them.
* Standard lending criteria applies.
The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice. © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.