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 one way to increase your wealth.
Property is a popular asset class among Australian investors, and most people will require a home loan to invest. Read on to find out more about investor home loans.
Investment Property Home Loan Offer
Apply for the loans.com.au Essentials Variable Home Loan for investors who opt for principal and interest repayments and pay no application or ongoing fees.
- Interest rate of 3.99% p.a.
- Comparison rate of 4.01% p.a.
- Application fee of $0
- Maximum LVR: 80%
- Minimum borrowing: $50,000
- Max borrowing: $1,000,000
Compare investment home loan rates
Rates last updated July 28th, 2017.
- HSBC Home Value Loan - Resident Owner Occupier only
Application fee waived for Resident Owner Occupier only.
February 15th, 2017
- ING DIRECT Fixed Rate Home Loan - 3 Year Fixed Rate (Investors)
Interest rate increased by 0.10%
March 31st, 2017
- NAB Tailored Fixed Rate Home Loan - 2 Years Fixed (Investor P&I)
New interest rate is 3.98%
May 11th, 2017
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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 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 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, 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 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 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 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 add 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.
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.
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 10 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 amount. You should also be aware that many lenders have tightened their criteria and raised their rates for interest-only lending.
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 big 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.
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 an owner occupier home loan?
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. Investment loans also usually carry higher interest rates.
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.