Invest in property like a professional by learning about different types of investment home loan interest rates.
Investing in property can yield significant returns if done right, but it requires you to manage your finances in a suitable manner. Most leading banks offer home loans meant specifically for investment purposes and with these loans offering diverse features, finding one after taking your individual goals and requirements into account is not difficult. Paying attention to the interest rate any such loan attracts is important, but taking your existing financial situation into account is crucial.
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Investment home loans and interest rates: the basics
Are investment home loans the same as regular home loans?
Investment home loans are essentially the same as conventional home loans and in most cases, lenders allow borrowers to use their regular home loans for investment purposes.
Aspects that can vary include the interest rate you have to pay, minimum or maximum Loan-to-Value Ratio (LVR) and interest repayment options. For example, if you want a loan to buy a home to live in you might qualify for up to 95% LVR, but this can reduce to 80% if you want to use that loan for investment purposes.
Features that you find in regular homes loans also come as part of investment loans, although these can vary from offering to offering. You can, for instance, find fixed rate and variable loans, loans that offer repayment flexibility, as well as loans with offset accounts.
What interest rates are available on an investment home loan?
As is the case with conventional home loans, you can find investment loans that offer fixed, variable and split interest rate options. A fixed rate investment loan enables you to lock the interest rate for a given time period, ranging from one to ten years.
Such loans attract fixed repayments through the course of the fixed rate term and they protect borrowers from any rise in interest rates. Fixed rate home loans generally have less features than a regular variable rate and can come with high exit fees.
The interest rate of a variable rate investment loan fluctuates in accordance with market conditions and this affects the repayments you make. What this means is if the interest rate rises, so do your monthly payments and the opposite is true as well. People who choose variable rate loans do so in order to benefit from low interest rates in favourable market conditions and these loans also tend to offer more flexibility and features when compared to their fixed rate counterparts.
A split rate investment loan is where one part of the balance attracts a variable rate and the other portion attracts a fixed rate for a given duration. This gives you the option to take advantage of benefits of both types of interest rates, while also reducing your risk should there be a significant rise in interest rates.
How are investment home loans calculated?
Calculation of interest with most home loans in Australia happens on a daily basis, taking the outstanding balance and compounding interest into the account. Simply put, you end up paying interest on the interest that is charged. Some banks will charge this interest daily, although most banks and lenders will charge this amount monthly or as per the frequency of your repayments—whether that be weekly, fortnightly or monthly.
Most investment loans give borrowers the option to make interest-only repayments, typically for up to five years, although some are as long as 15 years, letting you repay the balance upon the sale of the given property. Some investment home loans allow borrowers to pay the interest due in advance and all such payments are tax-deductible because they do not involve repayment of the loan amount. In some cases, you can even expect a discounted interest rate if you choose to pay the interest in advance.
How to get the best rate on an investment home loan
Given the number of lenders who provide investment home loans, the wide variety from which you get to choose, as well as Australia being a competitive market, it is imperative that you compare your options. When comparing different home loans, make sure you compare all features, not just interest rates.
If you have all your financial dealings like bank accounts, credit cards and existing loans with a single bank, you may be able to ask them for a discounted rate. Alternatively, you can look for a package loan that allows you to move your savings accounts, transaction accounts and credit cards under a single umbrella to take advantage of a discounted interest rate. Such loans tend to attract monthly or annual fees.
The amount of money you borrow can also have an effect on the interest, where some lenders offer discounted rates if you borrow over a certain amount.
How can I minimise the interest I pay on an investment home loan?
Many variable rate investment home loans come with offset accounts and these can help you save interest. This is because the calculation of interest takes the balance of the offset account into consideration.
For example, if you have an outstanding balance of $140,000 and have $20,000 in your offset account, interest is calculated on the difference between the two, which is $120,000. Bear in mind, though, that offset accounts can come with minimum and maximum limits.
Getting an interest-only loan not only minimises your monthly repayments. It can also lead to tax savings as interest-only repayments are tax-deductible. Getting a package home loan can also minimise how much you pay in the form of interest, but only if it offers a lower interest rate.
The LVR, or how much you wish to borrow in comparison to the property's value, can also affect interest rates. For instance, if you require a lower percentage of the property's value, you can get a lower rate.
Don't forget about fees and features
While the interest rate that any investment loan attracts requires your attention, making a decision based on this aspect alone is not recommended. If you're taking a fixed rate home loan to minimise risk from rising interest rates, bear in mind that you'll have limited flexibility in terms of making repayments. It also might not come with an offset account and might attract prepayment penalties.
The fees these loans charge are almost in line with conventional home loans and since these fees can amount to a considerable sum, knowing what you have to pay apart from the interest is important. Fees can come in the form of monthly fees, annual fees, application fees, loan disbursement fees, early repayment fees, legal fees and loan settlement fees.
Investing in property, when done knowledgeably, can lead to considerable profits and home loans meant for this purpose aim to make the process a tad simpler. Choosing the right loan, though, requires that you take individual circumstances into account because what works well for one person might not work for someone else. The ideal way to start is to compare all your options and once you narrow down on a few, don't forget to negotiate.