How much can I borrow when buying an investment property?

Whether you’re taking your first step into the world of property investing or you’re a seasoned investor looking to add another property to your portfolio, one of the most important steps is to work out your borrowing power. When it comes to borrowing power for investment loans, it tends to work a little differently compared to owner-occupier loans.

So, if you’re in the market for an investment property, read on to learn more about how much you could potentially borrow.

What sets investment loans apart?

Compared to home loans for live-in properties, banks and lenders tend to consider investment loans as higher risk. Borrowers are often more likely to default on a loan for a property they don’t live in themselves. Plus, the rental market can go through periods of volatility, so if an investment property is empty for a period of time there’s a chance that the owner might not be able to afford to make their repayments. Because of this, investment loans often come with higher interest rates and different terms to mitigate the extra risk they pose to the bank.

How much can I borrow for an investment property?

While each lender has their own lending criteria, most banks require a minimum deposit of 10% for investment loans. With that said, if you’ll be borrowing more than 80% of the property value, chances are you’ll also have to take out lender's mortgage insurance (LMI) to offset the additional risk.

What do banks look at when assessing borrowing power?

Banks like to make sure they’re lending to responsible borrowers before handing out hundreds of thousands of dollars in home loans, especially when it comes to investment loans. With this in mind, they’ll take a number of different factors into consideration to work out exactly how much you can afford to borrow to buy an investment property.

Here are some of the main factors they’ll review before offering you an investment loan.

Financial position

First things first, your bank or lender will thoroughly analyse your financial situation to make sure you’re in a good financial position to be able to service an investment loan. They’ll review your income, living expenses and debt with a fine-tooth comb to make sure you can afford your repayments. They’ll also work out your debt-to-income ratio (DTI) to determine your ability to service your loan. Ultimately, you want to do everything in your power to boost your income and reduce your debts and expenses to put yourself in the best possible financial position.

As part of this process, they’ll also run a check on your credit score to gauge your risk as a borrower. The higher your credit score, the more inclined they’ll be to offer you an investment loan. If you have a good credit score, you could even benefit from more favourable interest rates and loan terms too.

Loan to value ratio (LVR)

Lenders often look at the LVR, which is the ratio of the loan amount to the property's current value. Although the maximum LVR allowed may vary, it's common for lenders to require a lower LVR for investment properties compared to owner-occupied properties. As mentioned, most lenders require an LVR of 90%, so you’ll often need to stump up a minimum 10% deposit. But remember, if you don’t have a deposit of at least 80%, you could have to pay LMI, which is usually added to your home loan.

Property type and location

The type of investment property you’re looking at and its location can have a big impact on how much a bank is willing to lend you. Some lenders even have their own restrictions or preferences for certain property types or locations that could affect your chance of getting a loan for your investment property.

Whether you’re considering a standalone house, a unit, a townhouse or even a commercial property and the area it’s located can affect its market value and potential rental yield. This all contributes to the overall risk of the loan.

With this in mind, banks tend to look more favourably at properties in popular areas with strong rental markets. However, this could mean you’ll have to fork out more to actually purchase the property.

Rental yield potential

When it comes to buying an investment property, most borrowers are looking for an investment with high rental returns and so are the banks. They’ll take a look into the property’s previous rental history but if that’s not available they’ll review comparable market rental rates instead.

While it might be tempting to over inflate the property’s rental potential on your home loan application, it can potentially lead to financial strain if the property doesn’t perform as anticipated.

Home loan factors

From interest rates and the loan term to different repayment types, these various home loan factors play a key role in determining how much you can borrow to fund an investment property. It’s important to find a home loan that works best for you, your financial situation and your goals.

Investing in property is risky business, so it can be a good idea to chat with a professional to make sure you’ve got all your ducks in a row before you invest. Depending on your individual circumstances that could involve chatting to a mortgage broker, a financial advisor and/or a tax accountant.

If you’d like to get a better idea of your potential borrowing capacity, you can use our borrowing power calculator. It only takes a few minutes to enter all the relevant information to see how much you might be able to borrow when you refinance with Unloan. Learn more about our great loan features, competitive interest rate and your eligibility today.  

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.