Find an investor-friendly loan
The challenge for low-income earners, explains the finance broker, is the time taken to save for a sufficient deposit. Some lenders require a higher deposit for an investor than is required for an owner-occupier, so 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 as your portfolio grows.
In any case, having at least 10 per cent 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 the risk that you will have to pay lenders’ mortgage insurance (LMI).
Prove your financial discipline
Your lower income on an application can be offset by proving yourself a low-risk borrower. Having genuine savings will not only highlight to lenders your ability to consistently meet financial payments and live within your means, but it is also an opportunity to increase your borrowing power. The same can be said for lowering any existing debts.
“Keep credit card limits as low as possible as lenders always calculate servicing based on the limit, not the balance,” advises the broker. “Also, try to pay off any personal or car loans before applying for an investment loan. Because of the short-term nature of these commitments, repayments can have a significant impact on an applicant’s borrowing power and should be paid out where possible.”
Choose the right property
When it comes to choosing the property, low-income earners will generally do well to steer clear of anything that’s negatively geared, as you are not trying to offset your high income with losses and remember the importance of profit over the property.
“In my experience, regional areas are where to turn to, as the entry point to the market is lower,” says the finance broker. “Although there will generally be less capital growth, there are higher rental yields on offer.”
Seek out different strategies
For those who don’t have other non-deductible debt, they want to pay down first, adopting a principle and interest payment is the obvious choice, advises the finance broker. Interest-only loans are only suitable in specific circumstances when strong exit plans are in place, while principle and interest payments reduce debt, freeing up borrowing capacity and allowing the borrower to leverage equity.
Investing with a close friend or relative is another way to enter the market for those who earn a low income. As long as agreements are in place, including who is responsible for the mortgage and what happens if one owner 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 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 do carry higher interest, as a rule, to account for the higher perceived risk the lender is taking, but a good finance broker will see this type of loan as a stepping-stone to a prime loan, and help their client prove themselves so that they can switch to a prime loan after a year or so.