Investing to Grow Wealth through Property: Key Considerations
When purchasing a home or investment property, aligning several factors will ensure you're well-prepared to enter the market. Here are some key elements to consider:
Budget and Deposit
Borrowing CapacityYour budget is more than just your loan amount—it includes your deposit, legal fees, and stamp duty. Depending on your buyer type (e.g., first home buyer), additional costs may apply.
Equity ReleaseEquity release allows you to access the value of your existing property. Lenders generally allow up to 80% of the property value, based on a valuation. However, it’s important to remember two key points:
Equity isn’t cash: Equity only becomes accessible if you sell the property or take on further debt. Don’t assume equity alone can fund your next purchase—check your borrowing capacity as well.
Borrowing capacity: Accessing equity for other expenses, like renovations or a new car, reduces your total borrowing capacity. For example, if your borrowing capacity is $500,000 and you take $100,000 in equity, you’ll only have $400,000 left for a new purchase.
Pre-Approval
Getting pre-approval for a home loan gives you confidence that your finances have been reviewed by the bank, allowing you to bid at auctions with peace of mind. Pre-approvals generally last 3-6 months and can be renewed, though each renewal will trigger a credit check, which can impact your credit score.
It's advisable to apply for pre-approval only when you’re actively looking to purchase, as frequent credit checks can lower your score. If you need Lenders Mortgage Insurance (LMI), be aware that minimal credit inquiries are required within the last 12 months.
While pre-approval is useful, you may still undergo a final financial assessment at the time of purchase to ensure there have been no major changes in your personal or financial circumstances.
Factors Affecting Pre-Approval
Changes to your lifestyle or finances can impact your pre-approval status, including:
Increased spending habits (e.g., Uber Eats, Afterpay)
New credit facilities (credit cards, loans)
Major life events (e.g., pregnancy, new children)
Changes in employment or income (e.g., switching to self-employment or contract work)
Deposit Requirements
Most buyers need a deposit of 5-10% of the purchase price. Loans under 80% of the property value will avoid Lenders Mortgage Insurance (LMI). If borrowing more than 80%, many lenders also require proof of genuine savings—consistent funds held in your account for 3-6 months.
Gifted DepositsIf a family member provides you with deposit funds, you’ll need to submit a “gift letter” to prove it’s not a loan. This protects the lender from unknown risks.
Guarantor LoansAnother option is a guarantor loan, where a family member’s property is used as collateral. For example, if you’re buying a $500,000 home, you’ll need a $100,000 deposit to avoid LMI. If your parents’ home is valued at $800,000, the lender can hold both their title and your new property title as security.
By organizing your budget, understanding your borrowing capacity, and considering pre-approval, you'll be well-positioned to enter the property market with confidence.
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