Investment Home Loans

Compare investment home loans

Whether you’re buying an investment property for the first time or looking to add another to your portfolio, the fact is that you’re going to need finance. Find out about all the options available with Savvy and compare offers to help you find the cheapest investment loan rates with the best deal possible for your particular needs.

How do investment home loans work?

As the name suggests, investment home loans are a type of mortgage designed for the purchase of investment property. Investment loans vary just as much as the borrowers applying for them. They can either be principal and interest or interest-only loans. The type of investment loan that’s best for you will depend very much on your personal circumstances when you go to buy your new investment property.

For the deposit for your investment property home loan, you can either choose to use some of the equity you’ve already built in your first home or provide a deposit from savings you may have accumulated. Another option would be to ask a family member to act as a guarantor for the second mortgage you take out to finance your investment property. The main thing to remember is to look at all the options available to you before committing to one particular investment home loan in Australia. Compare the options you have until you find a loan that fits your needs just perfectly, which you can do right here with Savvy.

How much equity do I need to buy an investment property?

Most lenders require you to have at least a 20% deposit for any standard loan, which also applies when utilising home equity. The free equity you have available to you in your existing home is calculated by taking 80% of the value of your property and subtracting the amount you still owe from it. This is known as usable equity.

For example, if your home was worth $800,000 and you had $450,000 remaining to pay off your home loan, the calculation would be:

$800,000 x 0.8 = $640,000 (80% of your property value)

$640,000 – $450,000 = $190,000

This means you’d have $190,000 of free equity in your property which you could use as a deposit for an investment loan on another home or property.

What are the benefits of opting for an interest-only investment loan?

The benefits of interest-only investment loans boil down to tax advantages. If the cost of owning your investment property is more than the income it produces, your property is said to be negatively geared. You can claim all costs associated with your investment as a tax deduction, including the interest charged on your investment property loan. Therefore, if you pay interest-only on your investment loan, you can claim 100% of the loan costs as a tax deduction and therefore pay less income tax on any income you earn from your regular employment.

Your investment strategy may involve taking out an interest-only loan for a set number of years with a fixed interest rate. During this time, you can offset all your loan payments as a tax deduction, and use any rental income for other investment purposes. Once your fixed interest term expires, you could sell your investment property and benefit from the capital growth on your property – using the profit to pay off your original investment loan, and hopefully having sufficient profit left over to finance your next investment.

However, it’s important to note that interest-only loans are most suited to investors wishing to minimise their mortgage repayments with an eye to selling their investment property within a few years. If you have no intention of selling your investment property, an interest-only loan will prove to be more expensive in the long run and less beneficial.

Which loan features are available with investment property loans?

The loan features you have to choose from are the same as those offered for conventional home loans. How many of these features will be available to you depends on whether you opt for a variable interest rate or a fixed interest rate. In general terms, fixed-rate loans offer less flexibility and come with fewer additional features than variable rate loans do, but offer greater stability in repayments.

If you think you may want to pay your loan off faster, a variable rate loan may be your best option, as many fixed-rate loans come with penalties or exit fees for early repayment. Many fixed-rate loans also limit or cap the additional payments you’re able to make to pay down your loan faster. Some of the main loan features to choose from include:

Repayment flexibility

Traditionally, investment loans are based on monthly repayments. However, making your loan repayments weekly or fortnightly instead can save you thousands of dollars over the life of the loan. When you’re comparing loans, look for an investment home loan that allows you to make more frequent repayments. Use this fortnightly and weekly mortgage repayment calculator to see how much you can save by making your loan repayments more frequently.

An offset account

This is an account linked to your investment home loan account which offsets the interest you are charged on your principal sum on a dollar-for-dollar basis. For example, if you have a loan of $380,000, but have $80,000 in your offset account, you’d only be charged interest on $300,000. Offset accounts on an investment property loan can shave thousands off the cost of interest on your loan and can help you pay your loan off more quickly by ensuring you have more available cash to make extra lump sum repayments. They’re widely available with variable rate loans and are becoming more common with fixed rate loans.

Lump sum repayments

Being able to pay off your loan faster using lump sum repayments is a feature usually only offered with variable rate loans. Many Australians use the windfall of a good tax return to pay it down faster. Use this lump sum repayment calculator to see how making additional lump sum repayments can shave years off the term of your loan and save you thousands in interest payments. The best investment home loans in Australia offer you maximum flexibility to pay your loan off as quickly as possible.

Redraw facility

A redraw facility only allows you to redraw any additional payments you may have made to pay your investment property loan off more quickly. It doesn’t allow you to increase the principal sum you originally borrowed. Again, this feature is usually only offered with variable interest rate loans. It may seem counter-intuitive to redraw the additional money you’ve put into your loan, but it can prove to be a cheaper option than taking out a car loan, or a personal loan in case of financial need, such as conducting repairs or renovations.

Top tips to consider before buying your investment property

Think about your rental strategy

Before buying your rental property, think about what your strategy is going to be with regard to your new property. Are you buying it with the intent of getting a steady additional income from the rent, or is your intent to negatively gear it to relieve the burden of a large income tax bill? Plan your investment strategy before you buy. Remember the three R’s in real estate: make sure you buy the right property in the right location for the right reasons.

Do you have time to manage your rental property yourself?

Is your rental property located conveniently nearby to allow you to keep an eye on it? Are you able to respond immediately if your tenants request an urgent repair job done, or would you be better off employing a property manager to care for your rental on your behalf? If you don’t have the time and availability to look after your property and your tenants, you should budget to employ a property manager right from the start, rather than waiting until a crisis happens and your tenants are left in a tricky situation because you’re unable to get urgent repairs done.

Plan what you’ll do if your rental property suffers expensive damage

Make sure you have extensive landlord insurance to cover every eventuality that could go wrong with your rental property. Think about what you’d do if your property became uninhabitable due to a flood, bushfire or another natural disaster. Ensure your landlord insurance covers all eventualities, including the potential loss of rental income for an extended period whilst major repairs are undertaken.

Don’t squeeze your finances too tight – leave yourself breathing room

Don’t plan your finances so tightly that any slight variation causes you financial distress. The fact is that tenants may not always be reliable, for reasons within and outside their control, so allow yourself some financial breathing room. You shouldn’t rely on your weekly or monthly rental income to such an extent that one late payment leaves you unable to pay other important bills. It’s vital to plan carefully so that you’re able to ride the ups and downs of life without mortgage stress taking its toll on you.

Here’s more of your frequently asked questions about investment home loans

Are investment home loan rates more expensive than traditional home loans?

Generally, yes – the average difference between investment loan rates and traditional home loan rates is an increase of around 0.2% to 0.4% for an investment loan. The type of loan you’re offered comes down to the intent of the borrower. If you intend to live in the house, you’re called an owner-occupier and will be offered a traditional home loan. If you intend to rent out your new property and take out an investment property loan, it’ll attract a slightly higher interest rate because investment loans are considered riskier by most lenders.

How long can I pay interest-only on my investment loan?

Most fixed rate investment home loans in Australia are offered for a term of between one and five years, but this may be able to be extended up to ten years in some cases. The longer the term you opt for, the higher the interest rate you may be offered, but the longer the period of certainty and protection from rising interest rates you have. Don’t opt for a fixed rate, fixed-term investment loan if you plan to sell your property soon, or if you plan to change lenders or refinance your loan in any other way. Expensive loan break fees may apply if you ask your lender to change your loan term once you’ve agreed to a fixed-term loan.

What if I don't have enough equity in my home for an investment loan deposit?

If you don’t have sufficient equity in your home, you can either buy a cheaper property, wait until you save up sufficient money for a deposit, take out a personal loan (either secured or unsecured) to make up the difference you need for the deposit, or ask a family member to act as a guarantor for your home loan. You could also consider paying Lenders Mortgage Insurance (LMI) to enable you to get a loan with a deposit of less than 20%. You should seek financial advice before deciding if any of these options are suitable for your individual circumstances.

How do I find the best investment loan for my personal situation?

The most important thing to do is to compare home loans from different lenders until you find one that offers the lowest possible interest rate plus all the additional loan features you need. Savvy shows you clear home loan comparison information side-by-side so you have all the facts and figures you need at your fingertips to make a sound financial choice.

Can I pay off my investment loan early with a lump sum?

Yes – but if you have a fixed rate, fixed-term investment loan, you may find some fees apply if you want to pay your loan off more quickly than originally planned. Variable rate investment loans tend to offer more flexibility and may allow you to pay off your loan with no or fewer costs. Look for a loan that allows lump sum repayments when shopping around if you think it’s likely you’ll want to pay your loan off sooner. If you’re planning to pay your loan off sooner, use this extra repayment calculator to find out how much those extra repayments will shave off your loan term.

If I’ve used the equity in my home to finance my investment property, what happens when I want to sell up?

By using the equity you have in your home as security for your investment property loan, you’re effectively tying the two properties together. If you do want to sell your home, you’ll have to refinance your investment property loan at the same time you discharge the mortgage on your home loan. Make sure you have an alternative source of security for your investment property home loan before you put your home on the market. Alternatively, wait until you have sufficient equity in your investment property so that no further security is needed to guarantee your investment property loan.

What if I decide to move into my investment property?

Some lenders may specify that you’re not permitted to move into your investment property and live in it as an owner-occupier within a set timeframe of taking out your investment property loan. This may be within a year of you applying for the loan. Speak to your lender if you decide to change which property you live in because it could affect your home loan and you may need to refinance if the purpose of your loan changes.

What’s the difference between a negatively geared investment property and a positively geared one?

Negative gearing means you borrow money to invest in a property, but the cost of repayments is higher than the rental income you receive. In effect, your investment property makes a loss, which you can claim as a useful tax deduction and reduce the income tax you pay on your regular salary. A positively geared property means the rent you receive is higher than the costs of owning the property, so you gain an additional income but don’t have the tax advantages of negative gearing. Which option is right for your personal circumstances will depend on a range of factors such as your income and what other commitments and investments you may have.