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Borrowing to buy an investment property

My husband and I have pretty good jobs and are paying off our home with money to spare and we were thinking about buying a second home to rent out. Can you give me some guidance on how much we can borrow?

Without knowing your income, debts and what price range home you would be looking for I can’t be precise, but there are some general principles you need to know.

Lenders look at three main areas when they consider your loan application: your down payment, your debt-to-income ratio and your credit rating.

The debt-to-income ratio is the percentage of your gross monthly income (before taxes are taken out) that you pay toward debt as well as your projected total monthly home payment.

Down payments or deposits can be optional and it will depend on your ability to service the loan. Many landlords borrow the lot and take an interest only loan, as the interest is tax deductible.

I would do some homework on the tax benefits of being a property investor. You should talk to an accountant and a mortgage broker or two to get all of the information you need.

Work out how you would be affected by a 3 per cent increase in interest rates as well. Also, analyse how safe your jobs are as a dramatic change here could ruin your calculations.

Understand the costs of being a landlord and do the homework like a business plan, as that is what is happening when you go into the business of being a landlord.

Property is a great way to build wealth but make sure you know all of the costs, the threats and the opportunities. Don’t rush into it. Learn how to buy a property with your head and not your heart when it comes to investing in property.

You need a property that tenants will want to live in without blinking an eyelid and that’s when the investment should work out.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. 

Published on: Wednesday, May 05, 2010

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