Finance for your investment property, set up properly from day one

Most investors buy with either a cash deposit or equity from a property they already own. Equity is the difference between what your home is worth and what you owe on it, and lenders will usually let you borrow against part of it.

If you borrow more than 80% of the property's value, most lenders charge Lenders Mortgage Insurance (LMI). Sometimes paying LMI makes sense so you can keep cash in reserve, and sometimes it does not. We can look at both options with real numbers.

With principal and interest repayments you pay the loan down over time. With interest only repayments you only pay the interest for a set period, which lowers repayments for now but means the loan does not reduce and repayments go up when the period ends.

Interest rates for investment and interest only loans are often higher than for owner-occupied loans. Which option suits you depends on your cash flow and your plans, and it is worth getting your accountant's view as well.

Lenders look at your income, living expenses, existing debts and the expected rent. They usually only count part of the rental income, and they test your repayments at a higher rate than the one you would actually pay.

Because each lender does this differently, your borrowing power can vary a lot between lenders. Credit card limits count against you too, even if you pay them off every month.

Keeping your home loan and investment loan separate, and being careful about which property secures which loan, can make it easier to sell, refinance or buy again later. Offset accounts and loan splits are useful tools when they are set up for a reason.

If you are not sure where to start, a pre-approval is a good first step so you know your budget before you start looking.