Investment loan rates

The basics of investment loans explained

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 2 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 2-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.

Investment loan repayment types

You have 2 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.

Investor update: November 2021

Lending to property investors continues to rise. According to the latest Australian Bureau of Statistics (ABS) lending statistics investor finance rose 1.4% in the last month for which we have data. At the same time, finance for home buyers fell 2.7%.

Interest rates for investment loans, meanwhile, remain extremely low. The lowest fixed investment rate in Finder's database is 1.89%. The lowest variable investor rate is 2.24%.

Here are some of the latest statistics on investment loan rates and loan values, based on Finder's own data and the ABS. We update this information every month. You can learn more about our lowest rate tracking methodology and see more home loan statistics in our guides.

Updated on 5 November 2021 by Finder's home loans editor Richard Whitten.

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 and 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 2 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.

It may also be possible to purchase an investment via a self-managed super fund (SMSF) loan or fund part of your investment by borrowing equity in your own home through a line of credit loan.

Investment tax deductions

Australian property investors can take advantage of a number of tax deductions related to their property investment. This means your investment costs can end up shrinking your overall tax bill.

Investors can claim deductions including:

• Mortgage interest payments
• Property insurance
• Council rates and strata fees
• Property management expenses
• Repairs and maintenance

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.
• Trim your spending. Lenders examine an applicant's spending very carefully. Cutting back on unnecessary purchases in the 3 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, the lender 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.

Organise a free chat with a mortgage broker today

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.

More investment loan questions answered

• How much can you borrow for an investment property?

  In Australia most borrowers, whether home owners or investors, save a deposit of around 20%. Some lenders are reluctant to lend to an investor unless they have a 20% deposit, but it's definitely possible to buy an investment property with a 10% deposit. You could go lower, but there are fewer loan options if your deposit is 5%.

  When your deposit is under 20% you also need to pay lenders mortgage insurance. This can cost you thousands or even tens of thousands, so be sure to factor that in when looking to buy an investment property.

• What is the average interest rate for an investment property?

  Interest rates change all the time and vary between different types of loans. Investment loans are higher than similar loans for owner-occupiers.

  In the current market, both fixed and variable rate investment loans are quite competitive. You can find investment rates around 2%.

• What does an investment loan comparison rate mean?

  In Australia, all home loans come with 2 rates: the interest rate and the comparison rate. This includes investment loans. 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 and 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.

• How many investment loans can you have at once?

  There's no hard limit on how many investment properties you can buy or how many loans you can take out. But you do need to be in a strong financial position to get multiple loans to buy multiple investments.

  If you tried to buy a string of investment properties with 5% deposits, lenders would likely knock you back and your credit score would drop. But if you bought one, paid off a good chunk of it and had steady rental income, you could be in a position to finance a second investment – especially if the value of the first one has risen.

  It's a really good idea to talk to a broker if you're trying to finance multiple properties.

More guides and information to help you make a better decision

• Investment strategies
• Buying new versus established
• Rentvesting explained