How to get a mortgage for investment property

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It's no secret that mortgage rates are at an all-time low, making this an excellent time to invest in property. If you're thinking of buying an investment property, it's important to know the ins and outs of getting a mortgage. 

This blog post will show you how to get a mortgage for investment property – including where to go for financing and what terms to look for. So if you're ready to take the plunge into real estate investing, read on!

The three fundamental questions prospective property borrowers have are: 

  • Where can I borrow money from
  • How much can I borrow
  • Under what terms?

You can learn how to do a mortgage availability search and comprehend underwriting principles from this article. It includes several examples demonstrating how to compute investment loan installments, loan balances, and actual borrowing costs.


Mortgages are loans that are backed up by a piece of investment property. Lenders are referred to as "mortgagees" and borrowers as "mortgagors."

Investment property Loans and mortgages are examples of debt financing. A broader definition of debt includes additional financial instruments like bonds and debentures that grant the debt-holder (or lender) the right to interest payments and debt repayment.

What are the significant sources of financing in real estate?


1. Financing for Residential Property Lenders

All Australian retail banks, a few investment banks, numerous other financial institutions, mortgage managers, and brokers offer to finance the investment property.

They support applications from real estate investors buying an investment property or refinancing it. A difference between residential and other investment properties must be made when discussing sources of mortgages for property investment

Almost all mortgage lenders who provide investment property loans for the purchase and occupancy of homes also provide loans to people who rent residential property. 

Most residential lenders offer mortgages for both finished homes and those still being built, with the latter "drawing down" the loan to pay for the land and various construction phases. 

Owner-occupiers make up most of the "loan books" for most lenders, although the lending requirements for residential properties that generate income are comparable. 

In contrast, there are fewer lenders and different lending standards for mortgages for non-residential property.

The different types of lenders in real estate have been categorized, and each has been briefly discussed here.


(a) Banks

Retail (or "trading") banks have long dominated the residential real estate lending market. Historically, they have used customer deposits and more recently, they have "securitized" some loans. 

They are eager to take advantage of their large customer base with bank accounts and strive to offset their disadvantage of having staffed banking facilities' high overhead costs. 

Other financial companies provide loans with banking licenses, such as those using online banking and some investment (or merchant) banks.

(b) Building societies and credit unions

Although these businesses aim to employ deposited savings for personal and home loans, many also provide loans to investors in residential real estate. 

The Authorized Deposit-taking Institutions comprise banks, banking societies, and credit unions.

(c) Superannuation funds

A few superannuation funds offer loans; however, they might only be available to their members and owner-occupiers. A small component of the portfolios of several of these investment firms is made up of investment property lending.

(d) Finance firms

Retail banks now own the majority of finance companies in Australia. Some still provide residential real estate loans, although they focus more on lending for residential construction. 

They frequently consider lending to investors who might not match the bank's lending requirements, approving "low-doc" and non-conforming mortgages. 

They frequently issue debentures or other medium-term interest-paying instruments to finance their loans.

(e) Mortgage managers, lenders, and trusts

Mortgage managers, sometimes known as "mortgage originators," act as middlemen between investors and borrowers who want to profit from a pool of residential mortgage-backed securities (RMBS)

Due to the mortgage manager's administration of the loans, which includes collecting loan payments and sending out loan statements, the borrowers are likely unaware that their mortgages are included in a pool of securitized loans.

(f) Mortgage Brokers

Mortgage brokers are available to help customers get the best deal for their unique situations. As brokers, they look for financing options rather than approving loans. 

Although borrowers are typically not charged a price for this service, they should know that the lenders compensate the brokers through commissions. 

This compensation structure has raised questions about whether some brokers' recommendations may influence their connections to lenders.

2. Financing for Commercial property lenders

The sources of loans for private investors are limited to non-residential assets. Many lenders mentioned above feel uncomfortable or have determined that they are not authorized to offer mortgages on commercial, retail, industrial, or other non-residential assets. 

Others will only consider lending money to private investors or for non-residential purposes up to a certain amount (for instance, $500,000 or $1,000,000). 

Retail and investment banks, some investment institutions, financing firms, and mortgage funds are the primary lenders of multimillion-dollar loans to acquire more substantial income-producing investment properties.

Many mortgage originators and brokers focus on loaning investors and developers for non-residential properties.

There is no easy-to-find, comprehensive database of lenders willing to finance non-residential assets. 

Some lenders only lend money to certain types of homes or regions of Australia. Some cultivate specific clientele and build connections with investors, particularly those with property holdings.

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What are the terms for mortgages?

Mortgages are extensive legal contracts that outline the conditions that bind borrowers and lenders.

Other loan terms, like the maximum loan-to-value ratio (LVR) and the lender's fees, may not be part of the mortgage. 

Although many other terms and conditions are crucial in choosing a loan, the interest rate and how it varies over the loan are of utmost importance for most borrowers. 

Due to lender competition, new features in home loans have generally become available to investors and owner-occupants. 

The terms can change quickly, but by browsing the websites of lenders and loan researchers, it is possible to check the current interest rates, borrowing requirements, and terms of residential mortgages.

The interest rates and other loan terms for non-residential properties are determined by the borrower and the LVR and are not published.

Many of these terms and conditions, as well as the loan's origin, affect interest rates, but variations in rates over time provide the most noticeable disparities.


Interest rate changes for loans

Borrowers in Australia often choose between interest rates that may change over time and rates set for one to five years. 

A few lenders have provided loans with 10-year fixed interest rates. Some lenders provide the option for a portion of the loan to have fixed and variable rates.

Loan length

The following loan types are available in a variety of terms.

  • For residential investors, term loans or permanent financing may last up to 30 years for amortizing loans and 10 years for interest-only loans. These loans typically range from three to ten years for commercial properties.
  • Line of credit loans of five or ten years are customary for loans like home equity loans, which are loans backed by residential investment property and require a minimum of interest-only payments.
  • Construction finance is repaid when a project is finished and often lasts one to two years.
  • While permanent financing is secured, bridging financing is short-term, unsecured lending for three to six months.

Development and bridging loans have higher interest rates than term loans on finished properties. 

Most lines of credit loans secured by real estate have redraw or mortgage offset features and typically have slightly higher interest rates than other home loans. 

The loan length could exceed the time during which the interest rate is fixed.

It is typically advisable to take out a loan for the period during which an investor intends to hold onto an investment property. Doing this prevents the need to arrange a new loan during ownership and any associated prepayment penalties. 

The length of the loan does not often affect the initial interest rate because it is possible for the loan to last longer than the period for which the interest rate is established.

Principle of Repayment

How the home loan principal is paid back is based on the basis of repayment. The fundamental distinction between interest-only and amortizing loans—is between the two. 

The principal on interest-only loans is fully repaid with the last payment rather than decreasing throughout the loan. Interest-only loans for private investors are rarely offered for more than five years, and the investor may discover that they must renew the loan under unfavorable conditions.

You must repay principal and interest on amortizing loans during the mortgage term. Even if property values remain static, they allow the investor to raise the equity in the asset. 

Amortized loans have higher payments than interest-only loans, which consume more rental income.

Amortizing loans are often made with equal monthly repayments (also known as "credit foncier"), while they occasionally may be made with equal capital and lower interest rates. 

There is typically little to no difference in interest rates on interest-only loans, which typically have three to five years, and amortizing loans, which typically have terms of 10 to 30 years.

Loans with interest-only payments have lower payments than loans with amortization. Due to the danger that they may not be able to renew these loans under favorable conditions, most investors choose interest-only loans, even though their length is limited to five or at most ten years. 

In an amortizing loan, principal repayments are not tax-deductible, but interest payments are. The increased payments under amortizing loans consume more of the rental revenue rather than providing more significant tax deductions.

Based on repayment, loans may come in the following variations.

  • Repayment vacations, in which no repayment is necessary during a preliminary stage, such as the period when a property development plan is being built.
  • Loans that partially amortize may occasionally be negotiated for commercial properties.
  • Balloon payments which are one-time payments of principal due at the beginning or end of a loan
  • "Low start" loans, whose repayments rise in proportion to the growth of net property revenue. Because with these "low start" loans, interest may be levied at the usual rate, but less principal is repaid, they are less prevalent and considerably different from introductory interest rates.

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How to calculate loan repayments in real estate?


1. Interest-only loans calculation

Calculating interest-only payments involves calculating the home loan amount by the annual interest rate and dividing the result by the number of payments made each year.

For instance, $2,636.67 would be due each month for a loan of $452,000 with monthly instalments of 7% annually:

$452,000 x 0.07/12 = $2,636.67

The final payment would cover the loan balance of $452,000, totaling $454,636.67 as the last monthly instalment.

2. Amortizing Loans (Annually)

The investment property loan amount, the interest rate, loan term, the frequency of installments, and the method of repayment all affect how much must be repaid. 

Most loans that amortize have equal loan payments made each period, including interest on the loan balance and some of the original loan's principal repayment.

You can use the following formula to determine the equal payments that will result in no principal remaining after the last payment:


  • PMT denotes the monthly (or, in this case, annual) loan payment.
  • L stands for the investment loan sum. 
  • I is the annual interest rate on a loan.
  • N is number of loan periods.

For instance, a $452,000 loan amortized over 15 years at an annual interest rate of 7% would demand $49,627.17 in payments at the end of each year.

Creating an annual amortization schedule for such loans is relatively straightforward (especially if this is prepared on a computer spreadsheet). 

The annual interest rate equals 7% of the loan balance at the beginning of the year. The excess of the repayment over the interest is the principal repaid for the year.

The initial balance less the principal repaid over the year represents the loan balance at the year's end.

It is possible to determine the payments for a partially amortizing loan with a balloon payment at the end of the loan as interest-only payments on the balloon and amortizing payments on the remaining portion of the loan. 

In the early years of low start loans, the final balance may exceed the start balance since the earlier payments might not be enough to pay the interest.

When to expect loan payments

Loan payments are generally made monthly but occasionally more often. It is typical to assume that you need to make the required payments at the end of each month, the compounding frequency will be monthly, and the interest rate will compound at nominal annual rates. 

Most Australian lenders for residential properties use a complicated combination of daily interest charged to the borrower and monthly amortizing payments on an agreed date in the middle of the month.

Payments for non-residential loans must typically be made at the beginning of each month.

If the investor has a choice, the most convenient payment schedule is one where loan payments occur roughly a week after the significant tenant(s)' due dates for rent.

How to calculate monthly loan repayments and the outstanding loan?


Monthly amortizing loan payments

If the mortgage repayments are made at the end of each month, you can use the below calculation to determine the number of payments necessary to fully amortize a loan with compounding and more frequent payments than once per year. 

It is customary to divide annual interest rates by the number of periods to convert them to shorter ones.


If there are m periods per year, the number of periods is determined by multiplying the number of years of the loan by m, and the interest rate per period is determined by dividing the annual loan interest rate by m.

The yearly interest rate in this situation is referred to as the "nominal" annual rate. 

If this periodic rate accrues compound interest, the "effective" yearly rate would be higher. The nominal conversion-based periodic rates are marginally higher than the effective conversion-based periodic rates. 

Below, a nominal conversion is utilized, with monthly "rests" or recalculations of the outstanding principal.

Typically, the payments are calculated based on payments made at the end of each period.

For instance, a $452,000 loan amortizing over 15 years at an annual interest rate of 7% would call for monthly payments of $4,062.70. 

A very little difference in the payment is produced by using an interest rate of 0.6667 per cent each month. If the payments are due at the beginning of each month (also known as an "annuity due"), change the calculation formula -


Each payment would be $4039.14 if it were due at the beginning of each month for the same loan.

Payments in advance are a little lower than in arrears because each payment is paid earlier, resulting in less interest accrued.

The outstanding loan

You can use the reciprocal method to compute the payments to get the loan balance due after any period. The present value of the remaining installments is the amount still owed on loan:


Having made the loan above installments for five years, $349,905.539 is outstanding.


Borrowers should understand the three levels at which borrowers may be charged fees. 

First, when a borrower applies for a loan, most lenders require payment of establishment or application costs. It is frequently a flat cost of around $400 and $800 for residential loans up to $500,000. 

Depending on the loan size and if the mortgage's legal, valuation, and stamp duty are recovered separately or included in the establishment cost, the first fee for other loans may range from roughly 0.1 to 0.5 per cent of the amount borrowed. 

The registration of mortgages is no more extended subject to the payment of stamp duty in various States.

Second, some lenders may impose ongoing administrative, loan maintenance, servicing, or "in line" charges or fees during the loan. For a residential loan, these are usually $5 to $10 per month.

Third, even though mortgagors may have some implicit and statutory rights to redeem at any time, there will probably be expenses associated with repaying the loan. 

In general, the lender has the right to request that the borrower pay any administrative and legal fees associated with paying off the mortgage. 

The borrower may be assessed a "delayed establishment fee" if they choose to pay off the loan early rather than or in addition to an initial fee. The lender may impose "prepayment costs" if the borrower decides to repay the loan early. 

If the market interest rates have declined since the rate was fixed and the loan has a fixed interest rate, the prepayment charge may be enough to compensate for the lender's lost income. 

The prepayment fee is frequently a payment "in lieu of notice" if the loan has a variable rate; for instance, this could be set at the next two or three months' interest or payments.

The cost of borrowing may increase by around 0.5 per cent annually over the interest rate mentioned due to the mix of fees. Lenders are not required to provide "comparison rates" for loans used to purchase real estate. 

The "annual percentage rate" (APR) or "annual average percentage rate" is, however, something that some lenders and loan researchers do show. 

The initial and ongoing costs are included in these and other adjusted prices. These are usually calculated over seven years based on a specific loan amount and quoted loan interest rate, but they do not account for deferred or prepayment fees.

If a holding period assumption is made, the cost of borrowing can be estimated, considering all loan fees.

Mortgage Underwriting

The lender's decision to offer a loan and its terms is mortgage underwriting.


Each lender's underwriting guidelines strike a compromise between the need to 

(i) generate a profit from lending

(ii) maintain an acceptable level of default risk. 

Each lender establishes its standards based on its business objectives and the present state of the capital market. 

The suitability of the borrower and the property is considered while underwriting mortgages. Before approving a loan, the lender must be convinced there is a low danger that the debt payments won't be made.

In the absence of this, the lender must have faith that there will be enough assets to cover the existing loan. 

The below table depicts the underwriting criteria as a fundamental matrix with the two primary lender concerns in the rows and ways the property and borrower can fulfill them in the columns.

Underwriting Criteria




Meeting loan payments

Rental income.

Debt coverage ratio.

Period to lease expiry.

Other reliable income.

Related part guarantee.

Recovering capital if default

Loan-to-value ratio.

Forced selling period.

Other secured assets.

Unsecured assets.

Ability to pay back the debt

The ability to repay the loan is nearly always the lenders' top priority, with security in the event of failure coming in second.

When evaluating finances for residential properties, an accepted standard is that loan payments must be much lower than the property's net rental income when added to the borrower's uncommitted income. 

Some lenders would use an independent rental value rather than the higher actual rent. Some lenders only account for roughly 80% of the residence's net rent when determining the maximum debt service. 

Many lenders would evaluate the borrower's character the same way they would an owner-occupier, looking at their employment history and credit history while utilizing a credit scoring system to determine eligibility.

The lender would typically expect the net rental revenue to be more comfortable than the loan installments for mortgages on commercial properties that generate an income. 

The "debt coverage ratio" (DCR) or "interest cover" is a common way to represent this, where


Lenders demand that commercial properties meet a minimum DCR or interest cover. These two measurements apply to interest-only loans, typical commercial borrowing. 

Since only the interest part of loan payments is considered when calculating the interest cover for amortizing loans, the ability of the rent to pay the mandatory principal repayments is disregarded.

If there are any concerns about the tenants' ability to pay the rent or if the lease contains any clauses that allow the net rental income to decline, lenders may raise the necessary DCR. 

To prevent loan commitments that would be difficult to fulfil if the premises are partially vacant after the current lease, several non-residential lenders limit the loan length to the remaining term of the significant lease(s).

Non-residential lenders occasionally seek written guarantees from borrowers that additional steady income will be used to repay the loan. This could be done in the short term to pay loan payments while, for instance, a new property is leased. 

If the borrower has a good credit history, has previously taken out loans from the lender, or transacts other business with them, this is more likely to be approved. Maintaining a relationship with one lender is more beneficial than searching for the cheapest possible debt.

Protection in the case of a failure

The lender's second criteria are that if the borrower defaults on the loan payments, there are enough assets to satisfy the principal of the loan, any past-due interest, and any associated fees. It is often referred to as the loan's "collateral security."

If borrowers default, lenders strongly dislike the inconveniences, delays, and paperwork and only use this security as a last resort. Loan cancellations and forced property sales may harm the "loan book's" overall worth.

Lenders enforce a maximum loan-to-value ratio (LVR), expressed as a percentage, and demand an independent property appraisal

Unless there is loan insurance, the maximum loan-to-value ratio for residential rental properties is typically 80% of the market value. 

Suppose at least a portion of the debt is secured against another real estate (such as the family home or another property with little to no outstanding debt). In that case, some lenders will still provide loans for residential rental properties with 100% LVR.

Most lenders cap the LVR for mortgages on commercial buildings with an income-producing potential at 65 to 70 per cent. 

Some lenders will increase the permissible LVR if the net rental income can sustain a larger loan, provided that the borrower has other assets that the lender can seize in the case of failure. 

If the mortgagee is the direct owner of the other assets, the lender may not insist that the loan be secured over those and the real estate for dependable borrowers. 

Alternatively, the lender may demand that the borrower get guarantees from connected parties. For instance, if the borrower is a family business, the company's directors may be asked to provide personal guarantees to uphold the loan obligations if the business defaults.

If a lender thinks the property type or a characteristic would make it challenging to sell, especially during a market downturn, they might lower the maximum LVR. 

Lenders are cautious when dealing with unusual or outlying properties. Lenders are still free to evaluate each non-residential loan on its own merits rather than being constrained by established guidelines.

It can be frustrating for borrowers who may find it challenging to obtain financing for purchasing properties they believe offer unique advantages.


The financial liberalization of the 1980s gave Australians more options for lenders and loan terms. Still, the global credit crisis limited those options and entrenched the retail banks' hegemony in the property lending market. Property investors owe about one-third of the value of existing residential loans.

Owner-occupier demand for residential real estate financing does not move in tandem with investor demand. Loan sources and terms for residential investments are typically the same as those for homeowners and occupants, and they are readily available online. 

Due to the fragmented commercial real estate mortgage market, thorough analysis and negotiating may result in lower borrowing costs or better conditions. 

The loan with the lowest interest rate may not always be the best deal. The correct loan term, the method of home loan repayments, and the number of ancillary costs are crucial.

The process through which lenders determine to whom and how much they will lend is known as loan underwriting. 

Although their underwriting guidelines differ slightly, understanding their processes aids property investors in applying to and negotiating with real estate lenders. 

Lenders typically look into the investment property and its tenant in addition to the minimum DCR and maximum LVR requirements for income-producing properties.

Now that you know how to get a mortgage for investment property, it's time to start shopping for your dream investment property! You can be a successful property developer with this No-Money Down Property Development Course.


Can you get a mortgage to buy a second investment property?

It depends on a lot of things, like your credit score, the amount of equity you have in your property, and how much money you're borrowing. But generally speaking, you can get a mortgage to buy a second investment property.

Some lenders may be more willing to give you a loan if the purpose of the purchase is to rent out the property instead of living in it yourself. And if you already have a mortgage on your primary residence, that could help make you eligible for a loan on another property. So it definitely pays to do some research and talk to different lenders to see what's available.

What do I need to qualify for a mortgage in Australia?

The main requirements to qualify for a mortgage in Australia are that you have a good credit history and that you can afford the monthly repayments. Other factors that lenders may take into account include your income, your employment status, and the size of your deposit.

If you're looking to buy a property in Australia, it's important to get pre-approved for a mortgage so that you know how much you can borrow and what the interest rates are. This will give you a better idea of what properties are within your budget and will help you avoid being taken advantage of by sellers who know that buyers are desperate to purchase a property.

What is the minimum mortgage loan amount in Australia?

Minimum mortgage loan amounts in Australia can vary depending on the type of property you're looking to invest in. For instance, if you're wanting to buy a house as an investment property, the minimum loan amount is typically $100,000. However, if you're looking at an apartment or unit, the minimum loan amount is usually around $250,000. Of course, these are just general guidelines and your actual eligibility will be determined by your lender based on a number of factors including your income and employment history.

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