Australian Mortgage Options says property investment is a prime tool for wealth creation, even for people on a modest wage.

Options for borrowing 100% of a property price are running out, now the Global Financial Crisis has forced institutions to re-assess the level of risk they are willing to accept, but for those with a 5-10% deposit  property investment can work in the long term.

“If you can generate that deposit, the concept of becoming an investor is a realistic and realisable wealth creation strategy,” says Robert Projeski, managing director of AMO.

He says a realistic borrowing scenario could be someone earning $35,000 per annum and wanting to borrow $150,000. As this is a house for investment purposes only, and not for you to live in, the lending conditions and interest rates are different than those for owner occupiers.

“The lending conditions do differ in terms of your ability to borrow on what is currently a modest income, but generally not in a bad way,” he says. 

The benefit of borrowing for an investment property with most banks, brokers and other lenders is that they will take into consideration the potential future rent as a component of the total income earned per year. This has the effect of increasing your capacity to borrow.  

For example on top of the $35,000 income you earn per year, the $150,000 property may earn a rental return of $7,500 per annum based on a 5% rental yield.  Therefore you are utilising $42,500 in total income rather than $35,000 in income to ascertain borrowing capacity.

However, if you are also paying your own rent, this will be factored in as an expense by the lender which will weigh against your potential borrowing capacity.

Another benefit of buying an investment property is that most banks will also take in to consideration negative gearing in their credit assessments, which in layman’s terms is the differential between rent received and interest payments on the property.  It is only of benefit if the interest payments are greater than the rent received. 

The difference between interest payments and rent received can be claimed back on your tax returns each year and the assessing calculators used in a bank’s credit department will pick this up and add it back, therefore maximising your borrowing capacity.

The interest rates for an investment loan generally do not differ from the rates offered for owner occupied property.

You do need to take into consideration that you are not entitled to the First Home Owners Grant if the property is initially purchased for investment purposes.

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