Five Different Considerations for Investment Property Loans
Investment property loans have various options and features to choose from, and although these features may seem irrelevant now, they can make a big difference in your financial future.
Thus it’s crucial to research different types of investment property loan options before going ahead and making costly mistakes that could have easily been avoided.
Here are some things to consider when taking out a home loan for a property investment strategy.
1. Leveraging Equity From Your Existing Property
The most common way is to take out a home loan via the use of equity if you own any other property.
In particular, if you have paid off a significant amount of your home loan, you may be able to access that property’s equity and use it towards your new home loan deposit.
Using a property’s equity means that the property is used as security for the mortgage. Borrowers who use their home equity as a deposit can waive lenders mortgage insurance costs (LMI) if equity is sufficient.
You’ll need to refinance or top up your initial home loan to access its equity for your new investment loan deposit. The benefit of doing so could result in a new interest rate that’s lower, thus saving money on the way.
2. The Differences Between Property Investment and Owner Occupier Home Loans
If you’re unable to use your home equity, a home loan for property investment doesn’t differ that much from standard home loans in terms of the features and structures available.
What does differ, though, is that investment property loans can be a little more expensive than owner occupier home loans. They can have higher interest rates in comparison to your standard owner occupied home loans.
Deposit-wise, you may only be allowed to borrow up to 90% (including mortgage insurance) of the purchase price while with owner occupied property you’re able to borrow up to 97% including mortgage insurance in some cases.
3. Structuring Your Investment Property Loan
When it comes to structuring your investment property home loan repayments, you have two options.
An interest-only period can be set until that portion of the home loan term is complete, and after that period it rolls over to principal-only.
Principal and Interest
A principal-and-interest loan is where you pay for both simultaneously for the entire home loan term.
How do you determine which one you should choose?
Generally, your choice should be based on your available cash flow and goals at the time. If you want to save money in the short term or use your money for investment purposes, an interest-only period on your home loan repayments could help you do that.
On the other hand, principal-and-interest repayments offer more structure and stability as the amount doesn’t change a lot over time and it could be a part of your retirement plan if you’re planning to do so in the near future.
When it comes to investment property and investment strategies, some investors do at times choose interest-only repayments but structure them to be paid in advance for taxation purposes due to an influx of income.
Therefore instead of monthly repayments, they pay twelve times that amount all at once at the beginning of every year until the interest is paid off.
Doing this can bring forward tax-deductible interest repayments, which could reduce your taxable income.
4. Choosing the Most Suitable Interest Rates For Your Home Loan
Home loans for investment properties have the option of fixed or variable interest rates.
Fixed Interest Rate
Fixed interest rates lock in the rate at the time of signing for your investment loan, and the rate doesn’t change for the duration of the fixed term. This can be beneficial if interest rates are low when buying as it guarantees that you won’t have to pay more if the market rate goes up. Essentially, it is a set and forget loan.
Variable Interest Rate
Variable interest rates fluctuate as the cash rate changes. This can be beneficial when rates go down, but it means you’ll have to pay more on your investment property if rates go up. Home loans with variable interest rates generally offer additional features that may be useful to people interested in buying investment property – see more below.
A split loan option provides the greatest flexibility, by combining the two interest rate options. This option allows you to enjoy a fixed-rate period and a variable interest rate at different times of your investment loan.
5. Investing More Effectively With Variable Interest Loans
Choosing a variable interest rate home loan generally gives you the option of two features:
- an offset account, and/or
- a redraw facility.
These features can be a good option with investment property if you’re saving for something like home renovations. Paying extra money along with your monthly mortgage is an easy way to do this and you can withdraw the money whenever you’re ready.
An offset account is a separate transactional account linked to your home loan used for savings. The money in this account is offset against the remaining loan balance of your existing home loan, so you can save a significant amount of interest. Borrowers can access this money easily and freely with no penalties or extra fees.
You could arrange with your employer to pay your salary into your offset account and use a credit card with an interest-free period to fund daily living expenses. By paying the credit card off every month you will avoid credit card interest charges. Having your salary deposited in your offset account for a longer period of time lowers the amount of interest paid on your home loan.
A redraw facility is similar, except the funds you put in aren’t as easily accessible: you need to apply with your lender to access them at times. Logistically, interest saved is the same if you used a redraw and offset account.
Buying an investment property means choosing the right home loan that suits your current financial circumstances and future goals.
An investment home loan comes with various options, including:
- using the equity in your other property to pay your deposit,
- an interest-only mortgage or a principal-and-interest option,
- a choice between fixed, variable or split interest rates with a fixed rate period, and
- features such as an offset account or redraw facility.
Planning and managing an investment home loan takes patience and understanding. A financial advisor can be helpful along the way.
A mortgage broker can help you through the investment loan application process once you’ve been advised what to do to suit your financial situation.
We help clients with home loans across the park at the Mortgage Agency – from taking out their very first home loan to buying their fourth and fifth investment property.
To get started on your investment home-buying journey, contact us today to discuss investment loan options to suit you.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.