Property investors should consider the following when finding the ideal mortgage:
My mortgage broker suggested I go on an interest only investment property loan as it would keep down the costs, and the interest can be claimed at tax time.— Matt Corke, Head of Publishing Ventures
An investment loan is a mortgage investors use to buy investment properties. Investment loans have higher interest rates than owner-occupier loans because lenders view investors as riskier borrowers.
Investors can choose fixed or variable repayments. Variable rate loans are easier to pay off faster or refinance without an exit fee and are currently lower than fixed rate loans.
But a fixed rate loan lets you lock in an interest rate and forget about rates rising. There's also the option of splitting your loan into fixed and variable portions.
Most owner-occupier borrowers choose principal-and-interest repayments. You borrow money and pay it back, plus interest. Investors can do this too. But they have another option.
Interest-only investment loans start with very low repayments because you're just paying the interest charges. These loans cost you more in the long run. But they let investors maximise their tax-deductible debts in the short term.
As an investor, most expenses related to owning and maintaining your investment property are tax-deductible.
This includes your loan fees and your loan interest charges. If your investment costs you more than it generates in rent, you can offset the cost by reducing your tax bill.
On 06 February the official cash rate held at:
4.35%
The lowest investor loan in Finder's database is:
6.19%
With this rate, assuming the average investor home loan size of $579,633 you would be making monthly repayments of:
$3,548
The lowest investment loan rates are Newcastle Permanent's Real Deal Home Loan, Greater Bank's Great Rate Home Loan and ME's Flexible Home Loan Fixed
The Reserve Bank of Australia (RBA) has kicked off its 2024 cash rate decisions with a hold to the national rate at 4.35%.
The cash rate had been rising over 2022 and 2023 in a bid to slow down inflation which was rising above the RBA’s target.
And it worked! Inflation is slowing. The latest figures show the Consumer Price Index (the way the rate of inflation is measured) is about 3% lower than it was during the peak.
But it’s still higher than the RBA’s target. Until the CPI rate drops below 3% it’s unlikely we’ll see rates start falling. The RBA predicts the CPI will fall below 3% in 2025, but the latest figures were ahead of predictions.
Although commentary has turned towards when the RBA will start cutting the cash rate, governor Michelle Bullock said in the latest cash rate announcement that “a further increase in interest rates cannot be ruled out”.
The good news for borrowers is that banks are starting to respond with their own rate cuts. While most rate cuts have been to fixed rates, Macquarie Bank recently cut its variable rates.
Graham Cooke heads up Finder's insights team, which is responsible for conducting data-driven research. He also regularly appears on TV and radio. He has taken part in more than 500 interviews to discuss financial news and trends.
Lenders treat investment properties as higher-risk purchases, which means it can be more complicated to get an investment loan approved.
Here are 6 tips to make your investment loan application a success:
A 20% deposit is a big ask, but it makes you a less risky borrower (and lets you save on LMI).
A quick check of your credit score is always a good idea. Sometimes there are red flags or errors you might not have noticed. If it's not in great shape, it's time to start improving it.
Cutting back on unnecessary purchases in the 3 months leading up to your application boosts your chances of approval.
Every lender has different eligibility criteria. Some may be stricter when lending to investors.
If the property you're buying looks like a riskier investment due to its size, property type or location, the lender might reject your application.
A qualified broker can help match you up with a bank or lender whose policies and criteria best suit your personal situation.
Lenders use your property as security. If you can't repay the loan then your lender has to sell the property to recover its debt.
"Assuming a lender will accept every property is a mistake," buyer's advocate and property investment adviser Cate Bakos told Finder. "I've seen investors purchase properties with limited kitchen facilities in place only to be shocked when the property is rejected altogether by the lender.
"If a lender already has too many borrowers investing in similar property types to yours in the same postcode it may reject your application. This reduces the lender's exposure to risk."
Property investment can be both risky and rewarding. Here are some of the potential risks and benefits you should think about:
Common wisdom is to opt for an interest-only investment loan so you maximise your tax deductions. And it's a sound approach. The only exception is if you have already paid off the mortgage on your own home. This is not tax-deductible. At that stage, consider going principal and interest and throwing all the money you can at that investment loan to create a debt-free source of income in retirement.
Nicole Pedersen-McKinnon
Freelance finance journalist
Investing in property allows Australians to build investment wealth in 2 ways:
Many investors ideally want to purchase properties that offer a consistent rental income and a high capital growth over time.
But investors in Australia have a big tax advantage: negative gearing. Even if your investment costs outweigh the rental returns in a financial year, you can use the loss to shrink your tax bill.
"Property investment is a game of finance with some houses thrown in the middle," Metropole Property Strategists founder and CEO Michael Yardney said.
"Beginning investors think they can just go to any bank, get the lowest loan rate and they will be set. But strategic investors don't use finance to buy properties, they set up their finance to buy the time to ride the ups and downs of the property cycle so their investment properties can increase in value, giving them the equity and cash flow to buy further properties."
If you need access to a sum of cash and you've already built equity in your home, you can refinance your home loan to a higher amount and withdraw the difference in cash. Here's how it works.
Home loan cashback deals can help you refinance to a cheaper interest rate and get a lump sum cash payment. Compare the latest deals and check your eligibility today.
Work out how much you need to earn to buy a house in any Australian suburb.
Chris Gray takes us through four things people get wrong when buying property.
Auction expert Damien Cooley gives the lowdown on why property auctions are the best way to sell right now.
Richard Holden from UNSW Business School delves into Australian home loan sizes and rate cuts
We can't make clear predictions about Sydney's property market, but here's what the data suggests.
There's profit to be made in renovating your home, but don't jeopardise your insurance when you do.
Our comprehensive guide to home loan statistics.
Australians are now drinking less than we previously were. Find out how you could save $40,000 by simply not drinking alcohol.