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 you.
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.
Use our repayment calculator to get a better idea of your repayment costs.
How do investor loans differ from typical home loans?
Lenders see mortgages for investment as a higher risk than regular owner occupier home loans. Home loans for investment often have stricter lending requirements and borrowing limits, plus higher interest rates. They may also have a higher LVR, requiring the borrower to save up a larger deposit. Read more about how these loans differ from owner-occupier loans.
What types of loans are available for investors?
The table above contains a wide range of variable and fixed rate investor mortgages, but there are also more specialised loans that might be useful for different types of investors. You can read more about these products on the following pages:
Using the equity in your home to fund an investment
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, although you will need to pay back the deposit loan and the money you've borrowed to buy 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
How can I make sure I'm eligible for investor finance?
Your lender needs to be confident that you can repay your investor mortgage. To maximise your chances of success, be sure to save a good-sized deposit, prepare clear evidence of your income and check your credit score for outstanding debts and liabilities. Get those under control before applying for a loan.
The property you buy also affects your application. Some lenders are reluctant to fund purchases of risky properties, such as very small apartments in suburbs they judge to be oversupplied. You may need to approach a different lender or come up with a bigger deposit.
What strategies can I use to make a profit on my property?
Savvy investors can look at multiple property strategies to maximise their wealth creation. 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 property's capital gain to grow. Learn more about negative gearing.
Buy and Hold. The simplest 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 strategy. Check out our renovations guides for more information.
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
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 starting a property portfolio before you decide if the strategy is right for you.
Rental income. An investment property can increase your cash flow by providing you with a second income source through rental income. A well-located property could provide 3-5.5% rental yield.
Capital gain. When it comes time to sell your property, you may benefit from making a capital gain if the value of your property has risen.
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, 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.
Costs. Buying a property can be costly. 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.
Selling a property takes time. Selling property can take a while. This means if you might need your investment cash on short notice, then property might not be for you.
Untenanted periods. If you rely on rental income to help pay off your property investment, you face the risk of untenanted periods which means that you may suffer financially. This is why it's important to ensure you have a cash buffer.
Frequently asked questions about investment property loans
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.
SMSF loans - If you plan to purchase a property as an investment 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 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.
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.
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.
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.
Richard Whitten is Finder's home loans writer. He helps Australians understand the ins and outs of mortgages so they can find lower rates and make smarter property decisions. Richard trained as a high school English teacher at the University of Sydney, but found that mortgage management was more rewarding than classroom management. Before working at Finder he lived in Seoul, where he edited textbooks and ran communication courses for Korean corporations.
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