Investment Home Loan Rates
Investors are going to need a mortgage type that fits their plan as well as competitive investment home loan rates. Find out how you can get one.
An investment loan differs from a regular home loan as you borrow money from the bank to purchase a property which you will then use as an investment.
Whether you’re a landlord on the look for a better mortgage or you’re new to the game as a property investor, this article will assist you in understanding investment rates and finding a loan that is competitive and fits your investment plan.
The basics of investment loans explained
Investment loans is really just a different type of home loan. Like some mortgages they have their own standard features such as:
- Interest rate. The interest rate will essentially determine your total borrowing costs.
- Comparison rate. To give you a better idea of your loan costs, the comparison rate will factor in fee costs towards the investment loan rate.
- LVR, or loan to value ratio, is how much you’re able to borrow in concordance with your investment property and its market value. For example, if you have an 80% LVR it means you will need a 20% deposit. If you have a maximum insured LVR at 90% for your investment loan, you’ll be able to claim it with a 10% deposit.
- The majority of investment loans will probably have some fees, like a settlement or application fee. Ensure you’ve looked into these costs when you evaluate and compare your options for a loan.
- There’s a lot of investment loans that will offer you extra repayments and redraw facilities that can come along with 100% offset accounts.
You will find that interest rates will be higher for investment loans in comparison to a regular home loan that someone would use to purchase a home to reside in. Because you’re an investor, your loan requirements could be different from the regular home buyers as well. You’re obviously not on the search for a family home and aren’t looking to sort your debts as soon as you can. But rather, you’re on a mission to build wealth through your tactical investment plan.
Tax deduction benefits will apply to your investment loan, so make sure you’ve taken this into account when comparing different investment loans.
Take a peek at some of the different types of investment loans to see how they function. This’ll help you finalize your decision.
Investment loan rate types
Investment loan rates appear as:
- Some investment mortgages will have variable rates that are able to change at any moment. In comparison to fixed rate loans, variable rates generally have a wider range of features and flexibility. They also tend to be lower, but this isn’t always the case.
- Getting a fixed rate loan investment allows investors to lock their arranged repayments in place if they want to. Being able to calculate how much you’ll be paying towards repayments every month can be very beneficial. However, you need to know that fixed rates are not as flexible and are a bit difficult to refinance.
- Split rate. The majority of lenders will allow their borrowers to split their loan into variable and fixed portions so that they’re able to reap a few of the benefits from both types.
Investment loan repayment types
Besides your decision on the rate type, you’ll also have to pick a repayment type. There are two selections you can make: interest-only or principal-and-interest. Just note that you’re able to pick a fixed or variable rate with both repayment types.
- Interest-only repayments: A lot of investors will choose to go with an investment loan that has interest-only repayments. With this specific type, you’re only obligated to pay the interest at first, which allows for lower repayments in future. Although, this will be more costly for you in the long run as your debts will take more time to be paid and sorted. But, the interest on your investment loan is indeed tax-deductible.
- Principal-and-interest repayments. In regards to these loans, you will pay for the interest and money you’ve borrowed all together. This option is generally the safer of the two because every repayment you make, your debt will decrease whilst any equity you have will increase.
A lot of lenders will opt to use interest-only investment loans in order to decrease their expenses for a number of years and then preside to sell their property when market prices increase. There is a lot of risk that comes with this strategy, however, if done at the right time in the right market it can be very profitable.
When deciding what repayment type you want, know that interest-only rates tend to be higher on average than principal-and-interest rates.
Comparing investment loans
When looking for the right mortgage, property investors should consider the following:
- Find a low rate. If you’re a borrower, the lower the interest rate means the lower the repayments you’ll have to make. This results in a less expensive investment property. However, you’ll find that interest on your investment loans will be a tax-deductible investment cost. Therefore, finding the lowest rate possible isn’t necessarily the best option but more so finding the right loan to fit your investment plan.
- The less amount of fees, the better. Dodging fees where you can will give you a cheaper loan. Once more, mortgage fees are tax-deductible for investors.
- Loan type. You need to decide between a variable or fixed rate type and figure out if you want principal-and-interest or interest-only repayments.
- Certain features a mortgage can give such as an offset account can be very beneficial if you know how to make use of it. It all comes down to your investment plan.
- Borrowing capacity. The amount of money you’ll be offered from different lenders will vary. You’ll have some who’ll offer you a considerably larger amount in comparison to others. It’s definitely worth your while doing some research into various lenders and finding out a quick estimate of your borrowing power before you make any final decisions on who you’ll go with.
What is the investment loan comparison rate?
All home loans in Australia will have two rates: the comparison rate and the interest rate. We already have a fair idea about interest rates so read on to know more about comparison rates.
A comparison rate is one that is calculated through a home loan that is essentially hypothetical. So, none of your personal or specific details are applied when calculating the comparison rate. The comparison rate is seemingly beneficial as it helps identify the costs of certain fees, yet in all honesty it’s probably easier to look at the loan fees in depth for yourself.
Investment plans and more
Your investment plan will determine the type of investment loan you’ll require. There are a few investors who could prefer utilizing a basic “buy and hold” plan of paying off the mortgage, collecting rent and waiting for a generous capital gain.
There are also other investors who may have great confidence in the potential boom of prices. These investors may often hold off on their investment for a number of years and try to sell their investment at a later date when the prices are better, to make a larger profit.
Negative gearing is often another factor that is taken advantage of by a lot of investors regardless of their particular loan type.
It’s also doable to buy an investment through a self-managed super fund (SMSF) loan or finance a portion of your investment through the borrowing of equity in your own home via a line of credit loan.
Investment tax deductions
Tax deductions on investment costs is something many Australian property investors will take advantage of. This can result in your investment costs subsequently shrinking your total tax bill.
Certain tax deductions can be claimed by investors, like:
- Interest payments
- Property insurance
- Repairs and maintenance
How would I go about applying for an investment home loan?
Investment properties are often viewed as high risk purchases by lenders. Which essentially means it can be slightly more difficult to obtain an investment loan and have it approved.
Here’s some useful ways to achieving a successful investor loan application:
- What is your credit score. Having a quick look at your credit score is recommended just to ensure you don’t have any outstanding debts or credit problems that could be detrimental to your application.
- Build a larger deposit. Having a 20% deposit on hand is super beneficial when applying for a loan as an investor. It’s possible to locate a loan that’ll let you borrow above 80%, but they’re quite difficult to get a hold of.
- Gather all your paperwork. Having financial documentation that supports your application is essential.
- Cut down on spending. Your spending will be closely examined by the lender. So, make sure you’ve cut back on non-essential purchases 3-months prior to applying for your loan as it will boost your approval chances.
- Be certain about your property. Remember that your property is the security for the lenders. So if you’re applying for a property that isn’t necessarily considered “up to scratch”, there’s a genuine chance they reject your application on that basis alone. Investing in a smaller unit in a location where there are a lot of properties can be viewed as a red flag by lenders, so make sure to talk to the lender about properties or location before applying.
- Book in with a mortgage broker. Having a qualified broker to conversate with can assist you in applying for a loan that you can actually land. They also offer services that’ll help you with the nitty gritty paperwork too.
Do you think you’ve got what it takes to be an investor?
Investing in property is risky business. Capital gains and rental incomes is never guaranteed. So, before you jump the gun, here’s a few potential pros and cons you need to consider before making your decision.
- Rental income. Your cash flow can be increased through investment properties as they act as a second source of income through rent. Finding a property with a great location could give you 3-5.5% rental yield.
- Capital gain. When it’s time to finally sell your property, you could benefit from making a capital gain depending on whether or not the price of your property has increased.
- Tax and depreciation benefits. Investment loan interest charges can be deducted, as well as other investment costs by way of your tax.
- Add value. Unlike market shares, renovations can be done to your property to add value to your investment.
- There are a variety of upfront costs investors will need to know, these include stamp duty, conveyancing, lenders mortgage insurance (LMI), building and pest inspections and legal charges. Because you’re the owner of the property, you’ll need to take responsibility for any ongoing costs like maintenance and repair.
- Managing tenants. If you’re a landlord you have an obligation to deal with your tenants that are currently living in your property. You can either pay commission and outsource these tasks to a real estate agent or just do it yourself.
- Selling takes time. If you’re looking to sell your property, be prepared to wait a while. If you’re looking for investment cash in a short timeframe then maybe property isn’t necessarily a good idea for you.