This article was fact-checked and reviewed by Paul Wilson, an Accredited Property Investment Adviser and Australian Financial Services Representative with over 25 years' industry experience. Content has been updated for 2021.
A competitive investment loan rate lets you fund your investment purchase while paying less interest. Even though loan interest for investors is tax deductible, there's no sense paying more than you need to. And to get the best investment loan you also need to find a mortgage with low fees and features that suit your investment strategy.
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Investment loans are a type of home loan that allow you to purchase a rental property. When comparing loans, you'll consider things like:
Interest rate. The interest rate determines how much you pay in mortgage repayments each month.
Comparison rate. This rate factors in fees to the investment loan rate, giving you a clearer idea of your total loan costs.
LVR. Loan to value ratio (LVR) is the amount you can borrow relative to the value of your investment property. An 80% maximum LVR means you need a 20% deposit.
Fees. Most investment loans have fees attached, such as an application or settlement fee. You may also need to pay government or statutory fees, if you're refinancing. Be sure to ask your lender for an estimate so you can factor in these fees when comparing loans.
Features. Many investment loans offer features that you can use to your benefit, such as allowing extra repayments (so you can pay the loan off sooner), or redraw facilities. Some may even come with 100% offset accounts.
Investment loans tend to have higher interest rates than loans for owner-occupiers (people buying homes to live in) because the lender views this as being a higher risk loan. Essentially, they have to worry about two sets of people being able to pay their bills – you as the property owner, and the tenant. This is a little more complicated than a straightforward loan where they only have to consider whether the property owner can pay the mortgage, which is why interest rates can be slightly higher. Keep in mind that your mortgage interest repayments will be tax deductible, along with a number of other property-related expenses.
As an investor, your loan needs may differ from ordinary home buyers too. For instance, you may not be looking to buy a family home and pay off your debt as fast as possible. Instead, you may be aiming to keep your tax-deductible investment loan as high as possible, while you focus on paying off your non-tax-deductible home loan.
With an investment property, you're aiming to create wealth, so your finance needs may be different. An investment loan comes with tax deduction benefits too, so you should discuss this with your accountant as there are a number of tax benefits to owning an investment property.
To help you make a better decision, let's look at a few different types of investment loans and how they work.
Investment loan rate types
Investment loan rates can be:
Variable. Investment mortgages can have variable rates that can change at any time. These loans typically have more features and flexibility than fixed rate loans, and they may be lower or higher than a fixed rate. This is because they are determined by a number of current economic factors, including the cash rate as set by the Reserve Bank of Australia (RBA). If the RBA cash rate is 0.25%, this means the bank has borrowed your loan funds at that rate. If the bank then charges you 2.5%, it has added a margin of 2.25% onto the loan. If and when the RBA changes interest rates, or if your lender decides to increase or reduce interest rates, your loan repayments will change as well.
Fixed. Investors also have the option to lock their repayments in place with a fixed rate investment loan. Fixed rates are priced very differently to variable rates, as they are determined based on what the bank or lender thinks interest rates will be in the future. For instance, if you select a two-year fixed rate, your bank will offer you an interest rate based on what changes they expect from the market over that period. The benefit of a fixed rate is consistent repayments; knowing exactly how much you owe each month can be very useful. Be aware that fixed rates are less flexible and more costly to refinance than variable rate loans.
Split. The majority of lenders will allow borrowers to split their loan into fixed and variable portions so they can enjoy some of the benefits of both types. For instance, if you wish to borrow $500,000, you could fix $300,000 and borrow the remaining $200,000 under a variable rate.
You have two choices: principal-and-interest or interest-only. Note that with both types, you can generally choose variable or fixed rates.
Principal-and-interest repayments. With these loans, you repay a small amount of the money you've borrowed (the loan principal) and the interest together. With this type of loan, with every repayment, your debt reduces slightly and your equity grows. However, the principal part of the repayment is NOT tax deductible.
Interest-only repayments. Many investors opt for an investment loan with interest-only repayments. With these loans, you only repay the interest at first, which makes for smaller repayments. The other benefit is that the interest on an investment loan is tax-deductible, but the principal isn't. Many investors will take out an interest-only loan on their rental property, while they pay more towards their (non-tax-deductible) owner-occupier home loan. Generally, interest-only loans are available for 1-5 year loan-terms, after which the loan reverts to principal-and-interest.
When considering repayment types, note that principal-and-interest rates are typically lower than interest-only rates.
Australian investment loan statistics at a glance
Here are some of the latest statistics on investment loan rates and loan values, based on Finder's own data and the Australian Bureau of Statistics. We update this information every month. Learn more about our lowest rate tracking methodology and see more home loan statistics here.
How do I compare investment loans?
Property investors should consider the following when finding the ideal mortgage:
Interest rate. For any borrower, a lower interest rate means lower repayments, which makes your investment property less expensive. But interest on investment loans is a tax deductible investment expense, so getting the absolute lowest rate is less important than getting the right loan to suit your investment purpose.
Fees and charges. Avoiding fees where possible can also help make your loan cheaper, but again, mortgage fees for investors are generally tax-deductible.
Loan type. As well as choosing between a fixed rate mortgage or a variable rate loan, you should consider whether you want interest-only or principal and interest repayments. The length of the loan is also important, especially if you are refinancing – do you wish to take out a standard 30-year loan, or would a shorter period be more suitable?
Loan features. Mortgage features like an offset account can be very helpful, not to mention financially rewarding, if you know how to take advantage of them. It all depends on your investment strategy.
Borrowing capacity. Every lender will offer you a different amount of money, depending on their own policies, criteria and risk profile. Some may lend a lot more (or a lot less) than others. It's worth looking at multiple lenders to get an estimate of your borrowing power before deciding on one particular loan or lender.
What does an investment loan comparison rate mean?
In Australia, all home loans come with two rates: the interest rate and the comparison rate. The comparison rate is a legal requirement that factors in the cost of fees in addition to interest. All comparison rates are calculated on a hypothetical home loan valued at $150,000 and they don't provide specific details about your own potential costs. While a comparison rate is helpful because it highlights the cost of fees, you're better off looking at the loan fees in detail for yourself.
Investment strategies and more
The type of investment loan you need depends heavily on your investment strategy. Some investors may prefer a simple "buy and hold" strategy of collecting rent, paying off the mortgage and planning for capital growth.
Some investors, confident of a boom in prices, may only hold their investment for a few years before they try to sell at a profit. This more daring strategy often involves making smaller interest-only payments (meaning you don't repay the loan principal itself until you sell).
Negative gearing is another tax strategy that many investors take advantage of that can help make the cost of owning an investment property far more affordable.
Property investment is a game of finance with some houses thrown in the middle
"Beginning investors think they can just go to any bank, get the lowest loan rate and they will be set. On the other hand, 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 and give them the equity and cash flow to buy further properties.
They do this by setting up cash flow buffers in facilities such as offset accounts so that they have the ability to pay for unexpected expenses or manage cash flow shortages."
Focus on the long term
"This year the performance of our share market and the property markets, as well as the numerous pessimistic property predictions by the so called 'experts', reminded us that we should not make 30-year investment decisions based on the last 30 minutes of news.
Strategic investors have a long-term focus and don't change their plans based on what's happening now."
How do I apply for an investment home loan?
Lenders treat investment properties as higher risk purchases, which means it can be more complicated to get an investment loan approved than it may be for an owner-occupier loan.
Here are some tips for a successful investor loan application:
Check your credit score. A quick check of your credit score is a good idea to make sure you don't have any debts or credit problems that could harm your application.
Save a bigger deposit. Having a 20% deposit is an advantage when applying as an investor, as it means you don't have to seek approval of a lender's mortgage insurer.
Get all your paperwork together. Having a strong application supported by financial documentation is a must. Here's a checklist of what you need.
Trim your spending. Lenders examine an applicant's spending very carefully. Cutting back on unnecessary purchases in the three months leading up to your application may boost your chances of approval.
Choose your property carefully. Lenders use your property as security. If the property you're buying looks like a riskier investment due to its size, property type or location, they might reject your application. Buying a small unit in a postcode where there is an oversupply of such properties could be a red flag, for example. Talk to the lender before applying.
Talk to a mortgage broker. A qualified broker can help match you up with a bank or lender whose policies and criteria best suit your personal situation. They can help with the paperwork too.
How property type can impact your home loan approval
"Assuming a lender will accept every property is a mistake," buyer's advocate and property investment adviser Cate Bakos tells 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."
"Buyers also need to be confident that they aren't paying too much. Conducting recent comparable sales analysis, and focusing on recently sold properties on similar land size, with similar layout, style and age in a similarly regarded street is crucial. If they can't identify properties to support the price they are prepared to pay, they need to anticipate that the lender's valuer may not be able to justify it either."
Are you ready to be an investor?
Property investment can be both risky and rewarding. Rental income and capital gains are never guaranteed. Before taking the plunge, here are some of the potential risks and benefits you should think about.
Ongoing maintenance. As the owner of the property, you'll be responsible for covering ongoing costs such as repairs and maintenance. Strata fees and council rates will be payable too.
Managing tenants. Being a landlord means dealing with the tenants in the property. You can do it yourself or outsource this work to a property manager, who will charge a percentage of the rent as commission.
Selling can take time. Depending on the location and type of property, selling can take some time, which is why property is not considered a very liquid asset. If you need to sell to access your investment funds on short notice, then property might not be the ideal investment vehicle for you.
Rental income. You may earn a rental income that puts cash in your pocket right away; some investors may enjoy returns of $50, $100 or more every week, over and above the costs of owning the property. You can invest this money into the mortgage to pay the loan off sooner, or use these funds to supplement your own income.
Capital gain. Many investors buy property with an eye on the long-term gains, so they're aiming for future price appreciation. When it comes time to sell your property, you may benefit from making a capital gain if the value of your property has risen. You could potentially grow wealth far more effectively with property than through savings alone.
Tax and depreciation benefits. You can deduct investment loan interest charges and other investment costs from your income tax each month, making the cost of owning a property far more affordable.
The potential to add value. Unlike shares or other investments, you may be able to manufacture equity or price appreciation in your property asset by adding value through renovations.
More guides and information to help you make a better decision
A finance and property journalist of more than 15 years, Sarah is the Senior Editor for Home Loans at Finder. She was previously the Managing Editor of Your Investment Property magazine, Australian Broker magazine, and Your Mortgage, a home loan comparison site. She has written for The Sydney Morning Herald, Canstar, Bupa, Mamamia, Kidspot, Jetstar, Tourism Australia, and she has ghostwritten or edited over 20 books. Sarah also has a Bachelor of Arts in Communication from Griffith University. As a home loans expert, she is a regular media commentator and has a wealth of experience around mortgages, managing money and investing in real estate. Sarah is passionate about showing Australians how to make their money work harder.
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