We've all heard the stories: the fabulous tales of all those lucky homeowners who not only had the foresight to buy one property when houses were cheap, but who bought several and are now living off the fruits of their financial wisdom. Una McCaffrey reports.
The notion of becoming an investment property guru, in a position to retire a decade before our contemporaries, is one that will appeal to most workers. In practice of course, the business of making a fortune through property is not quite so straightforward. One area in which investors might run into some problems is with the investment mortgage, which will differ from a borrower's existing, owner-occupier loan on a number of fronts.
Mr Liam Ferguson of mortgage broker Ferguson & Associates, says the principal difference between the two at the start of the mortgage process (the approval stage) will be that the lender will consider investment loans in light of a borrower's "net income position" rather than making a judgement based on multiples of salary, as would happen in the case of an owner-occupier. This means taking a close look at all of the borrower's various forms of income and then another look at how much is left when taxation and other necessary charges have been taken out.
New loan repayments and existing financial outlays will also be taken into consideration, just to make sure that when all the repayments are taken together, they do not exceed 35 to 40 per cent of the overall net income. Lenders will then "stress test" the calculation to ensure that the ratio would not become more risky if interest rates began to climb.
Most borrowers will at this stage step in and point to the massive rental income that they hope to draw from their new investment. The bad news for some, according to Mr Ferguson, is that lenders will usually only factor in about 75 per cent of what a client claims the property will generate in rent. Lenders are simply being realistic by presuming that tenants will not occupy the rental property all year, every year. They are also presuming that the borrower will be using a portion of rental income to pay tax due under law. Mr Ferguson also points out that where an investor is buying the latest in a line of rental properties, lenders will typically look for a "fairly considerable sinking fund" to cope with expenses such as repairs or having a number of vacant properties at the same time.
Once the approval threshold has been crossed, investors will then begin to consider the kind of rate that might apply to their loan. Many novice investors will be unaware that some financial institutions will add what Mr Ferguson calls a "premium" of about half a percentage point to their standard rates when the loan is for an investment.
"The logic is that investment properties are a slightly higher lending risk to a bank," he explains. The obvious example here is where a client has two properties - her home and her investment property - when she runs into financial difficulties and can only meet one set of repayments. "Which one is she going to keep up the repayments on? Her home," concludes Mr Ferguson. He acknowledges that not all lenders price this way, with providers such as Permanent TSB offering the same rates to owner-occupiers and investors. As far as loan to value (the mortgage as a proportion of the property price) is concerned, investors will be given a little bit less than owner-occupiers. Mr Ferguson says that while some first-time buyers can get 92 per cent of the purchase price in a loan, investors will usually get a maximum of 90 per cent. He points out however that the most competitive investment rates are available on lower LTVs, with Bank of Ireland's best investor rate at 60 per cent or below, for example.
Another key difference between investor and occupier loans will come in tax relief, which will be structured as a tax deduction in investor loans. This means it must be claimed against the rental income rather than being applied at source as with occupier loans. The benefit in this of course is that while residential relief is available at the standard rate of 20 per cent on interest paid up to certain thresholds, there is no upper limit and no standard rating on investor relief.
