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Investing in property is not truly about real estate – it's about finance. With access to finance, you can buy property assets and build your wealth. When you have access to a competitive low-rate investment loan, you can borrow money and minimise your expenses when you buy a rental property to rent out and generate an income. Ideally, you'll generate a tidy profit through positive cashflow and capital gains, allowing you to build your wealth through property investing.
Whether you're just starting out as a new property investor and you're trying to keep your costs low, or you're an experienced landlord looking for a better mortgage, this guide will help you compare investment rates and find a competitive home loan that suits your investment strategy.
variable rate
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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:
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 rates can be:
Learn more about fixed versus variable rates
You have two choices: principal-and-interest or interest-only. Note that with both types, you can generally choose variable or fixed rates.
When considering repayment types, note that principal-and-interest rates are typically lower than interest-only rates.
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.
Property investors should consider the following when finding the ideal mortgage:
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.
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.
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 such as:
There's a lot more you can claim. Read our guide to tax and property investment for more.
Michael Yardney is the founder and CEO of Metropole Property Strategists and a veteran property investor.
"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."
"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."
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:
Organise a free chat with a mortgage broker today
"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."
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.
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