Investment Loan Rates
Looking to buy an investment property and want to find the best investor home loan rates? Read on to find out more!
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Getting the best investment loan rates for your property is crucial. It will help you to maximise your return on investment (ROI). This article explains everything you need to know to get the lowest investment home loan rates.
Do investor home loan rates differ from owner-occupier rates?
Yes, investment loan rates are higher.
Lenders view investment property and owner-occupied home loans differently. They view investment property finance as higher risk. Higher risk means higher investment loan rates.
If you will be relying on tenant rent to help make your repayments, this increases the lender’s risk. There are two major reasons why.
1. You may not always be able to find tenants for your property.
Any days, weeks or months where your property is vacant means less rental income for you. During those times, you’ll need to be able to fund the repayments without the help of your tenant’s rent.
Rental vacancy rates vary across Australia, so it’s important to choose your investment property location wisely.
2. You may have to reduce your rent to attract tenants when there are high vacancy rates.
When vacancy rates in a property market are high, it becomes a renter’s market. They have more choice. This means you may have to drop your rent to attract tenants. Alternatively, you may have to drop it to keep your existing tenants at the end of their lease.
Either way, you’ll have less tenant income to help you with your investment property loan repayments.
Many lenders will either reduce or not even count rental income when assessing your ability to make repayments. Instead, they want to be confident that you will make your repayments from other sources. If you can, this reduces their risk of approving your finance.
How much difference do higher investment loan rates make?
That depends on two major factors:
1. How much you borrow.
The more you borrow, the more interest you will pay.
2. Your loan term.
The longer your term, the more interest you will pay.
The table below shows the difference a higher investment loan rate can make on $500,000 borrowed over 25 years.
| Interest rate | Monthly repayment | Total interest payable |
|---|---|---|
|
Investment loan (2.95%) |
$2,358 |
$207,441 |
|
Standard home loan (2.61%) |
$2,271 |
$181,265 |
However, if the loan term is shortened to 20 years, your repayments will be higher but you’ll pay less interest.
| Interest rate | Monthly repayment | Total interest payable |
|---|---|---|
|
Investment loan (2.95%) |
$2,760 |
$162,518 |
|
Standard home loan (2.61%) |
$2,676 |
$142,334 |
Use our calculator to work out what your investment property repayments would be at different loan amounts and rates.
What are good investment loan rates?
This depends on two key factors:
Market interest rates at the time.
In times of very low interest rates, the difference between investment loan rates and owner-occupier rates won’t be as much. For example, less than 1%.
However, during times of higher market interest rates, the difference between the two can be larger.
The type of home loan you get.
There are different investment loan rates for different types of products. For example, you can choose between principal and interest (P and I), interest-only and line of credit finance. P and I loans require you to repay the amount you borrow plus interest.
Interest-only finance on the other hand only requires you to pay interest. They are usually only available for a short period (e.g. 1 to 5 years). After that time, the loan usually reverts to P and I. Interest-only loans usually have higher rates than P and I finance because lenders view them as higher risk.
Line of credit finance allows you to use the equity you have in another property as security. This lowers both the lender’s risk and the interest rate.
How much deposit do you need for an investment property loan?
That depends on your lender. Different lenders have different lending criteria. Many will require a minimum 20% deposit due to the higher risk. Others may be prepared to lend with a lower deposit or even no deposit.
However, it’s important to understand that if you can’t provide a 20% deposit, investment loan rates are higher. Other terms and conditions are likely to be stricter as well. For example:
- You’ll usually have to take out lenders’ mortgage insurance (LMI).
LMI lowers the lenders’ risk, not your risk, but you have to pay the cost of it. It covers the lender if you don’t make your repayments.
- You may have to provide a guarantor for the finance. The guarantor would become legally liable for your repayments if you don’t make them. It may be hard to find someone who is prepared to do this for you. You also may not feel comfortable asking someone to be your guarantor.
How to compare investment property loan rates
Look at the comparison rate
Lenders in Australia are legally required to advertise their loan comparison rates to comply with the National Credit Code. The comparison rate includes lender fees as well as the interest rate. When you see two interest rates on a home loan product, the lower one only includes the interest cost.
Look at optional loan features (and do a cost/benefit analysis)
Investment finance can come with a range of optional additional features. For example:
- Offset accounts
This can reduce the amount of interest you pay on your loan. For example, suppose you have $10,000 in your offset account. It will be taken off your debt for interest calculation purposes.
- Redraw facilities
This allows you to withdraw any extra loan repayments you make at a later date if necessary. It gives you flexibility. Make sure you can make extra repayments on your investment property loan if you want to, ideally without incurring fees.
- A line of credit
This allows you to borrow up to a pre-set limit as your equity in your investment property increases over time. It’s like a credit card limit, except your investment property is security and the interest rate will likely be lower.
It’s important to understand that these additional features will usually come at a cost. The benefit that a loan feature provides should outweigh its cost. There’s no point paying for it otherwise.
There’s also no point paying for a feature that you’re unlikely to use. For example, don’t pay for an offset account feature if you don’t think you’ll ever have much money in it. An offset account only saves you loan interest if you have a decent amount of money in the account.
Choose the best finance for your needs
Find the lowest comparison rate on a loan that has all the features you need. Only pay for the ones you need (if any). Don’t pay for any features that you don’t need or that you won’t use enough to get the benefits.
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The pros and cons of investment properties
They can help you to:
Generate rental income from tenants
A well-chosen property in a good location should be attractive to tenants. In general, the most attractive rental properties are close to the CBD and near good shopping, entertainment, public transport and education facilities.
Achieve capital growth
Australian property prices have a long-term record of growth over the past three decades. You can build your long-term wealth by paying down your loan and your property increasing in value.
On the flip side:
Potential tenant vacancies
This reduces your income.
Potential capital losses
Property values can rise as well as fall, especially in the short term. This can be a problem if you need to sell. Property should be viewed as a long-term investment.
Ongoing repairs and maintenance costs
To keep your property attractive to tenants and future buyers, you’ll inevitably need to spend money on it.
Tips to help you get the best investment home loan rates
There are lots of lenders and different types of investment property finance out there. Make sure you do your homework so you know the best investment loan rates available at the moment.
Lenders check your credit score when you apply for finance. You’ll have a good credit score if you have a track record of paying all your debts on time. It will also help if you don’t have a lot of other debt (for example, credit cards or personal loans). You can check your credit score once a year for free with credit reporting agencies.
The more deposit you have, the less you have to borrow. This lowers the lender’s risk and means you should be able to access better finance terms and conditions.
Alternatively, you may be able to offer the equity you have in your residential home as security for your finance. Again, this lowers the lender’s risk and will help you to get better investment loan rates to choose from.
