Getting an investment property loan with a competitive interest rate is essential when you want to maximise your profits.
Every property investor wants to get the most out of their investment. This means finding a competitive investment property loan with a good rate and useful features. It also means having a strategy in place. Read on to learn more about property investment or start comparing loans in the table below.
Investment Property Home Loan Offer
Apply for the loans.com.au Essentials - Smart Loan Package P&I and get a low variable interest rate, plus no application and ongoing fees.
- Interest rate of 3.89% p.a.
- Comparison rate of 3.91% p.a.
- Application fee of $0
- Maximum LVR: 80%
- Minimum borrowing: $50,000
- Max borrowing: $2,000,000
When comparing investment loans you need to look closely at the following factors:
- Rates. Rates have a big influence on your repayment size, so be sure to compare 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.
- Eligibility. Make sure the loan fits your investment strategy. 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.
- 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 monthly fees.
- Features. This depends on how you plan to use your loan. If you plan to put extra funds towards your home loan, ensure that your lender won’t penalise you. If you want to get access to these extra funds, seek one with a redraw facility.
Investment loans represent a higher risk than regular home loans. Home loans for investment often have stricter lending requirements and borrowing limits, plus higher interest rates.
An investment home loan may have a higher LVR, requiring the borrower to save up a larger deposit.
Like other types of home loan, investment home loans come in various forms, including fixed or variable interest rate, or principal and interest or interest only.
If you already own property you can use the equity in that property as a deposit on an investment loan. This means you don't need to save up a deposit.
To calculate the equity in your property simply subtract the amount of money you owe on the property from the value of the property.
Calculating the equity in your property
- Your home is valued at $750,000
- You owe $200,000 on the property
- Your equity = $550,000
With a line of credit loan you can borrow up to 80% of the value of the equity in your property. You can use this to fund an investment property. Compare line of credit home loans here.
Savvy investors can look at multiple property investment strategies. These include:
- Negative Gearing. If the expenses on an investment property are greater than the income it generates you're making a loss. In Australia this loss can be used as a tax deduction, which is called negative gearing. It's a good strategy to cover early losses while waiting for your investment's capital gain to grow. Learn more about negative gearing.
- Buy and Hold. The simplest investment strategy. You purchase a property and hold it with the expectation that the property will grow in value over time. This strategy can be combined with negative gearing.
- Renovate. Buy a property in need of work, renovate it into a far better property and you'll raise the property's value. This requires a lot of hard work and money but with the right property, the right renovations and the right market it can be a great investment strategy. 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.
- Passive property development. Most people won't undertake a major property development themselves. But passive property development allows you to stump up the cash to someone else who develops it for you. It's easier than going into property development yourself, but it's not without risks.
Watch: Investment strategies explained in under 3 minutes
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.
- Fractional property investment. Rather than buying a whole property, fractional investing allows you to buy a share in a property like you would with a company. It's similar to REITs but gives you more options and flexibility.
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 could provide 3-5.5% rental yield. When it comes time to sell your property, you may be able to benefit from making a capital gain.
- Flexibility. An investment property is one of the 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 tax advantages of property investment, including negative gearing.
- 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 or turn your property into a boarding house.
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 lenders 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 investors 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.
Compare some of today's great investment rates at a glance
- loans.com.au Essentials - Smart Loan Package P&I: Interest rate 3.89% (comparison rate 3.91%)
- UBank UHomeLoan - 1 Year Fixed Rate (Investor): Interest rate 3.99% (comparison rate 4.62%)
- Bank of Queensland Fixed Rate Home Loan - 2 Year Fixed Rate Discount Rate $150k+ <80% LVR (Investor, P&I): Interest rate 3.85% (comparison rate 4.97%)
- UBank UHomeLoan Variable Rate - Standard Variable Rate (Investor with Investor Extra Offer P&I): Interest rate 4.09% (comparison rate 4.09%)
- Tic:Toc Invest Loan Variable Rate Home Loan: Interest rate 3.99% (comparison rate 4.00%)
- loans.com.au Essentials - Variable (Investor, P&I): Interest rate 4.09% (comparison rate 4.11%)
Frequently asked questions about investment property loans and investing
What kinds of loans can property investors use?
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 may still be able to 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 may also be able to 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 you 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.
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.
The latest property market and investment news
A guide to taking advantage of interest-only investment loans. Compare and apply in seconds. Read more…
Apartments are dragging down the average home size, even as freestanding homes grow. Read more…
Negative signals from the property market have done little to dampen the Aussie love affair with bricks and mortar. Read more…