While you may not need a six-figure salary to invest in property, for those of you who earn a relatively low income may simply require a little more creative thinking to start a portfolio. Here are some tips to help you get started.
Find an investor-friendly loan
The challenge for lower income earners, is the time taken to save for a deposit. Some lenders require a higher deposit for an investment, than is required for an owner-occupier. Therefore you need to seek out a lender and loan that is investor friendly, or consider living in the property for a period after the purchase before converting it into an investment property.
In any case, having at least 10% of the property’s purchase price as a deposit will not only increase the likelihood of loan approval, it will also increase your borrowing capacity and lower your lenders’ mortgage insurance (LMI).
Prove your financial discipline
Lower income on an application can be offset by proving yourself as a low risk borrower. Having genuine savings will not only highlight to lenders your ability to consistently meet financial commitments but also your ability to live within your means. The same can be said for lowering any existing debts.
Keep your credit card limits as low as possible. Lenders will calculate your servicing based on the limits, not the balance. Also, try to pay off any personal or car loans because of the short-term nature of these commitments can have a significant impact on an your borrowing power.
Choose the right property
When it comes to choosing the property, if you have a lower income, steer clear of anything that’s negatively geared, as you are not trying to offset your high income with losses.
Seek out different strategies
For those who don’t have any other non-deductible debt they want to pay down first, adopting a principle and interest payment is the obvious choice. Interest-only loans are only suitable in specific circumstances when strong exit plans are in place. Whilst principle and interest payments reduce debt, free up borrowing capacity and allow you to leverage equity.
Investing with a close friend or relative is another way to enter the market for low income earners. As long as agreements are in place, including who is responsible for the mortgage and what happens if one of you 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% of applicants who are rejected by the major banks would be eligible for a loan through a specialist lender. Specialist or non-conforming loans carry higher interest rates, to account for the higher perceived risk, but a good broker (that’s us!) will see this type of loan as a stepping-stone to a prime loan. We can then help you switch to a conforming loan, in the future, as soon as you are eligible.
Property investment may not be as straightforward for low-income earners, but in most cases is still accessible. You just need the right properties and finance products!
For more information on finance products available to you, please drop us a line!