Learn the ins and outs of property investing and scout for a competitive investment home loan
Whether you’re looking for rental income or capital growth, investing in property could be a great way to increase your wealth.
For many, property is an accessible form of investment which is considered a safe and risk-averse strategy compared to many other asset classes.
In recent times, APRA's intervention for deposit-taking institutions to slow the growth rate of investor credit to below 10% has meant that it is more difficult for Australians to access investment loans.
However, with an abundance of investment loans on the market, Australians can still enter the real estate market and take advantage of competitive investment loan rates.
Investment loans vs. owner occupier loans
In many cases, investment loans are similar to regular home loans, but can have stricter eligibility requirements as they present a higher risk to the lender.
Some lenders might also charge slightly higher interest rates for investment loans.
Another difference is that with an investment loan your lender will factor in a percentage of the rental income it will earn into your servicing ability.
Compare investment home loan rates
Rates last updated May 24th, 2016.
- loans.com.au Essentials - Variable (Investor)
Interest rate increased by 0.20%
December 18th, 2015
- loans.com.au Fixed - 2 Year Fixed (Investor)
Interest rate increased by 0.30%
December 18th, 2015
- Newcastle Permanent Building Society Fixed Rate Home Loan - 1 Year Fixed
Interest rate increased by 0.10%
February 29th, 2016
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As with any investment, choosing to invest in property carries both benefits and risks. It's important you weigh up the pros and cons of property investment before you decide if the strategy is right for you.
Property investing benefits
- Rental income. An investment property can increase your cash flow by providing you with a second income source through rental income. A well-located investment property will typically provide 3-5.5% rental yield. When it comes time to sell your property, you can benefit from making a capital gain.
- Less risky than other investments. Property is viewed by many to be less volatile than other asset classes, including shares and financial instruments. This is partly because the property market is dominated by home owners rather than investors, and property generally appreciates over time while other assets may depreciate more rapdily.
- Flexibility. An investment property is one of few investments that is physically tangible. If your situation changes and you no longer wish to use your property as an income-producing asset, you can always move into it. However, be mindful that there may be capital gains tax implications if you choose to do this.
- Tax and depreciation benefits. If you have a knowledgeable accountant and quantity surveyor, there’s plenty of room to take advantage of certain elements of property investment, including negative gearing and also depreciation and tax deductions on aspects of your property.
- Readily available finance - There are many different home loans on the market which cater to different kinds of borrowers, including trusts and companies, the self-employed and bad credit borrowers. This means that investment finance is easily accessible by many Australians regardless of your credit file, employment status or earning potential.
- Control - Unlike other asset classes such as shares, many aspects of your property investment can be controlled. You can carry out value-adding activities on your property such as renovations, refinance your home loan if you find a better rate, turn your property into a boarding house – the choice is yours, provided you comply with relevant laws and council guidelines.
Property investing risks
- Costs. Buying a property can be costly, depending on the size and location. There are also many other upfront costs you may have to pay, including Lender’s Mortgage Insurance (LMI), stamp duty, building and pest inspections, conveyancing and legal charges. As the owner of the property, you'll also be responsible for covering ongoing costs such as repairs and maintenance, property management fees, council taxes, etc.
- Interest rate rises. Because many of us use home loans to finance investment properties, interest rates can play a major part in increasing or reducing costs. If interest rates go up, you’ll have a higher repayment.
- Selling a property takes time. Unlike shares and other investments, selling property can take a while and usually requires assistance from professionals such as a real estate agents, accountants and conveyancers. This means if you think you might need your investment cash on short notice, then property might not be for you. Also unlike shares, you can’t sell portions of your investment property off if you need the cash quickly.
- Untenanted periods. If you rely on rental income to help pay off your property invetment loan, you face the risk of untenanted periods which means that you may suffer financially. This is why it's important to take precautionary measures such as ensuring you have a cash buffer.
Buy, renovate and sell. Otherwise known as ‘flipping’, this investment strategy involves you buying a property, renovating it and then selling it in the short term. Because of the renovation, you may be able to increase the value of your property in a short amount of time and then make a profit when you sell. Whenever you renovate a property, property investment experts believe you should first seek the advice of local real estate agents to find out what prospective buyers are looking for.
Buy and hold. Some investors will buy a property with a more long-term view. They’ll keep their property and might earn an income from rent as their property’s value increases. They might also renovate their properties to help speed up the increase in value. This strategy can also utilise negative gearing, which is where the income generated by the property is lower than the costs associated with it, allowing the investor to realise tax benefits.Back to top
There are a range of different loans available when investing in property. Each has different benefits, negatives and uses.
- Package home loans - Package loans basically bundle a regular variable, fixed rate or split rate loan from a lender with other products such as transaction accounts, credit cards, insurance and personal loans. These types of loans usually come with an annual fee, but in return you get discounted interest rates and waivers on some upfront fees.
- No-frills loans - A no-frills or basic home loan offers minimal features in exchange for a lower interest rate and fees.
- SMSF loans - If you plan to purchase an investment property through your SMSF you need to use an SMSF home loan. These loans have more complex documentation and structures than regular home loans. These loans are usually ‘limited recourse’ loans, meaning if you default on the loan the lender is limited to the asset and nothing else.
- Low doc loans - If you’re a full-time investor or self-employed borrower you might not be able to prove your income in the way that those receiving a salary might be able to. Low doc loans require less documentation, but can come with higher interest rates and in some cases higher fees. They might also come with lower maximum LVRs.
- Bad credit loans - Even investors with bad marks on their credit file can still get home loans to finance investment property purchases. Bad credit home loans generally come with higher interest rates and more restrictive conditions to help minimise the risk a lender takes on by granting these loans.
- Line of credit loans - Also known as home equity loans, these are revolving lines of credit which utilise the equity in your home to finance an investment property. These loans can also be used to buy overseas properties.
- Bridging home loans - These loans are short term loans designed to be used to purchase a property before your existing property is sold. These can have higher fees and rates compared with regular home loan, and have a higher risk as you may be stuck with your first property for longer than you envisioned, leaving you with two investment properties.
- Construction home loans - A construction home loan allows you to save interest as you build a property. This is because these loans enable to access funds at the different stages when a builder will require funds, meaning you only pay interest on the amounts you've had to draw down.
Within the types above there are a few further home loan choices you'll have to make. These include:
A variable rate can fluctuate with the movement of the official cash rate and your lender's economic position.
This means rates can drop if the RBA decides to drop rates, but it can also get higher if the cash rate is raised and economic factors require your lender to lift rates.
A fixed rate allows you to fix in a rate for a set period of time. During this time, which usually ranges from one to ten years in Australia, your rates will not go up, meaning your repayments stay at the same level.
This has benefits, by allowing you to accurately create a budget and ensure your cash flow won't take an unexpected hit if rates are raised. Fixed rate home loans do have hefty break costs, so ensure that you won't have to exit your loan early.
These loans basically cut your loan into portions and then apply a combination of fixed and variable rates to different portions according to what you choose.
Depending on the loan you might be able to split into more than two portions and have some at variable rates, and some at fixed rates for different lengths. Split rates can help you see a bit of the benefits and risks of both interest rate types.
A regular home loan puts part of each repayment towards the outstanding loan amount (the principal) and part towards the interest due on your loan. An interest-only loan pays only the interest due, meaning your repayments are lower.
On the flip side, your principal will never get smaller making interest-only repayments, as none of your repayments are actually going towards the loan amountBack to top
The main features of a home loan that you choose to compare first will depend on your loan purpose. Here are some common ways to compare investment property home loans.
Eligibility - You will want to ensure that your investment strategy is fulfilled by your chosen loan. Not every home loan will be available for commercial property for example, and some loans will have limits on square meterage. Others will not be available for certain property types, such as inner city apartments.
Investor benefits - If you’re investing you might want to ensure your home loan has features which can maximise tax benefits or maximise cash flow. This includes interest-only options, interest in advance options, and 100% offset accounts.
Rates - You’ll also want to compare the interest rates available with your investment home loan. Rates have a large influence on your repayment size, so be sure to compare home loans and find one with the right rates, in addition to features and minimal fees. Also compare fixed and variable rates to find one which will suit your investment strategy. It’s no use getting a fixed rate for three years if you plan to sell your property in two for example.
Fees - Fees aren’t necessarily a sign of a bad loan, as long as what you’re paying for will save you money or reduce your loan costs over the life of your loan. If your loan has an annual fee for example, it may come with flexible terms which allow you to use it as you want to. Compare not only application, valuation and legal fees but also ongoing fees for features such as offset accounts and redraw facilities, and also monthly fees.
Other features - This last point of comparison will largely depend on how you plan to use your loan. If you plan to put extra funds towards your home loan, ensure that your home loan won’t penalise you. If you want to get access to these extra funds, seek one with a redraw facility.
While most property investors will choose to put their money in residential property for either capital growth or rental income, there are a variety of other strategies available for those looking to get into property investment:
- Investing overseas. There are a range of overseas property markets that are popular with Australians, including America and the UK. However, Australians who decide to invest in overseas property should be mindful of the exchange currency risk. Investing in overseas property may also require extensive research and the ability to get acquainted with local professionals, such as a trusted buyers agent, to ensure that the location and property is a viable investment.
- Investing through SMSFs. Those with self-managed super funds (SMSFs) can use their super funds to invest in property. These investments require separate loans which require additional documents and processing. You'll want to seek out help from an accountant, solicitor or financial planner before deciding to invest with your SMSF.
- Investing through REITs. A Real Estate Investment Trust (REIT) is a portfolio of properties listed on the ASX. Investors can buy into these portfolios in a similar way to shares. REITs can be comprised of Australian properties and foreign properties.
- Investing in commercial properties. Other investors might invest in commercial properties, including warehouses, factories, offices and retail shops. These can have higher rental incomes, but finding tenants can be difficult.
Frequently asked questions about investment property loans and investing
How does an investment loan differ from a home loan?
In most cases they won’t differ. Some lenders may have stricter eligibility requirements, or limit the amount you can borrow as investment loans can present a slightly higher risk than a regular home loan.
What are the benefits of negative gearing?
Negative gearing basically refers to when the interest you pay on your home loan is more than the rental income you’re making from your investment property. This usually means you’re making a loss on your property, but some of this loss is absorbed through tax effects. For more information please speak to a qualified property tax specialist.
Do I need a deposit for an investment property loan?
In most cases lenders will lend a maximum of 95% of the property value to investors. 100% and 105% loans have largely gone from the market after the GFC. Today, no deposit loans are generally only available for home buyers with a family guarantee. This means you should have at least a 5% deposit available.
What tax benefits are available for investment properties?
Property tax deductions and negative gearing are generally the two main tax benefits when it comes to investment properties. You can claim on the depreciation on the physical building, as well as what’s inside it. If used effectively, this strategy can help with your cash flow.
I’m overwhelmed by the amount of choice in the home loan market, what should I do?
There are many loans in the Australian market, so it might be a good idea to seek the services of a qualified mortgage broker. They’ll listen to what you want out of your home loan and then compare loans from a variety of lenders to find one which will suit you. Brokers are generally free to you as they’re paid a commission by the lender instead.
Do I have to pay capital gains tax on my investment property if I sell it?
Unless your property was purchased before September 20 1985 you’ll generally have to pay capital gains tax, unless your property makes no profit, or makes a loss. There’s a 50% discount available for those who hold onto their property for longer than 12 months. There are also some cases in which you can avoid paying this tax.