Many Australians will choose to buy property at some stage in their lives. Whilst many decide the first house they buy will be their home, there is also a case to be made for “rent-vesting”. This involves buying an investment (property or other) and renting where you want to live. If you have aspirations of buying a house, you should understand the differences, from a finance perspective of both buying to live and buying as an investment.
The deposit you need for a home versus an investment property will vary. This is because the Loan to Value Ratio (LVR) banks offer on home lending is generally higher than investment lending. Some banks will allow a lending limit of 90% of the value of a property for investment purposes (for medical professionals) whilst offering 95% or sometimes more for home lending.
The interest rate available to you under both scenarios will also vary. In 2017 the Australian Prudential Regulatory Authority (APRA, the Banks’ regulator) implemented significant changes to the way that banks lend. The changes were introduced to help curb investment lending and grant first home buyers easier entry in to the market. This means the rates for investment lending will be higher to incentivise home lending.
Interest Only or Principal and Interest?
Prior to APRA’s changes, interest only lending was a favourable strategy for many property owners. Both investors and homeowners alike could minimise their repayments and direct surplus cash to other investments or goals. Particularly for investment lending, being able to preserve the deductible loan balance offered significant benefits. Some banks will be able to offer interest only lending for certain borrowers but ensure you seek advice before obtaining any loan.
First Home Buyer and Homeowner Concessions
At present there are significant advantages afforded to first home buyers. These include the stamp duty concessions, the First Homeowners Grant and Capital Gains Tax concessions as well as spousal transferring opportunities down the track. These vary depending on where and when you buy, but can all be jeopardised if your first property is an investment so be sure to consider all these factors before you buy.
What about Negative Gearing?
If you own a rental property, you will be collecting rent from tenants and paying the expenses related to the property. For most property owners, the biggest expense is the interest on their borrowings. If your investment is geared to the point where the costs exceed the rental return, the property is said to be negatively geared. Whilst you will access a deduction for the loss you make, remember you are physically creating a cash shortfall which needs to be factored in to your financial plan.
Furthermore, you need the investment asset to be appreciating in value at a rate higher than that of the shortfall. If this is not the case, you are quite simply losing money, another reason to seek financial and property advice prior to embarking on this investment journey.
If you have further questions about your first home purchase, consult one DPM’s expert advisers today.
* The information contained in this site is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.