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 19 March 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 $574,217 you would be making monthly repayments of:
$3,514
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."
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