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.
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.
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.
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.
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:
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.
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.
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.
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.
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 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.