What is Rentvesting?
The term Rentvestor was actually trademarked and refers to young people who look to purchase their first property as an investment in a more affordable area whilst continuing to rent and live in their desired location and maintain their network of family and friends.
This investment strategy allows savvy young people to keep their current lifestyle but also benefit from long term gains from a well chosen investment property.
The profile of a ‘rentvestor’ might have:
- Approximately 10% deposit plus access to some funds to cover the associated costs of stamp duty
- A solid employment history with good income levels
- Their day to day spending under control and can display a sound savings history
- Little or no other debt to inhibit their borrowing capacity
Why Should I Consider Rentvesting
Rentvesting allows people the opportunity to get into the property market in an affordable manner and still maintain their network of friends and family. You would have tenants helping you pay off the home loan acknowledging you maybe paying rent yourself.
But the critical aspect of this strategy that makes it work is you have secured a well located property which should appreciate in value quicker than you can save money (and I don’t care how much you earn, you will never save money quicker than a well located property will appreciate over time).
Rentvesting might not be for everyone but it might just represent an option that works for you or someone in your family. Reach out and ask us for more details.
How Much Can I Borrow?
Our Borrowing Capacity is right up there with the key information you need to know before looking to transact into property.
Put simply our borrowing capacity is established by a lender looking at our incomes and expenses, assets and liabilities – it is that simple. Of course under a Rentvesting scenario the lender will factor in some rent or board to be paid yourself but offset this by the rent to be received from the investment property.
To give you an insight into how lenders work and think, we need to understand that they are quite conservative by nature. They are after all lending out shareholders money which indirectly might be you.
Typically when a lender assesses an application for finance, they will apply an ‘Assessment Rate’ which is typically a couple of percentage points above the actual lending rate on offer. This is simply because if they assessed all home loan applications at the rate on offer, and in 12 months time rates increase, then people that just passed the assessment test might be under financial stress – and no-one wants that.
Furthermore other incomes such as Rental Incomes from investment properties, overtime or bonuses are all discounted downwards a little. So the effect is that if we qualify for a Home or Investment loan (with the lender) then barring major financial issues we should be in a good position to service the loan without any duress which is what everyone wants.
The ‘takeaway’ from this is – speak to us here at Vault Plus Mortgages early on in the piece to establish your borrowing capacity so you know what you can and cant commit to.
What is this thing called Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is an Insurance premium that is applied when we have less than 20% deposit into a property purchase. The facts about Lenders Mortgage Insurance include;
- The premium is based on a sliding scale whereby the less deposit you have the risk to the lender increases and hence the cost increases.
- It’s a ‘one off’ commitment that is paid at settlement
- In most instances the cost of the premium can be added onto your Home Loan so you don’t have this ‘out of pocket’ expense when every dollar is counting
- Its purpose is to protect the lender in the event of the client defaulting
- The premium is paid by the applicant of the Home Loan
Who’s the genius that thought up this scheme (I hear you say)? Anyway whilst this all sounds pretty one sided in favour of the banks I’m a ‘half glass full’ person and if LMI didn’t exist banks would require us all to have 20% deposit as a minimum and so many good people wouldn’t be able to get into the market.
So if we have to, let’s use this ‘cost of investing’ to our benefit and help us secure a great investment property sooner that will grow in value over the long term and help us achieve our personal and family aspirations.
Don’t forget that under a Rentvesting scenario the property being purchased is an investment and therefore genuine costs associated with the acquisition ie/ Lenders Mortgage Insurance costs, Application fees and Government charges should be tax deductible so check this with your tax advisor.