The benefits and considerations of using a variable rate home loan for an investment
Here we'll have a look at variable rate investment home loans and investigate the advantages and disadvantages for property investors.
What is a variable home loan?
Variable rate home loans have been a popular choice for buyers for some time. One of the main reasons is they're the one of the most flexible of all home loans on the market. They're very simple to understand and often come with features which help you repay your debt early. This means you could potentially save thousands in interest and slash years of your loan term.
The main feature of the variable investment home loan is its flexible interest rate. A variable rate loan will fluctuate in line with the national figures as set by the Reserve Bank. When the Reserve Bank increases the base rate, variable rate products will follow suit. Likewise when rates across the country fall, so do the rates on your variable product. This could be ideal when things are steady economically and things remain low, but you could end up with much higher monthly repayments should the base rate go up.
Compare Variable Rate Investment Home Loans
Rates last updated June 23rd, 2017.
- IMB Essential Home Loan - LVR <=90% (Owner Occupier)
Comparative rate increases by 0.10% | Interest rate increases by 0.10%
April 5th, 2017
Some of other features popular with investment buyers are:
Offset facility: Here you can reduce the amount of interest you repay, by using money saved in other accounts to offset your home loan. This cuts the term of your loan and doesn't risk any dilution of tax.
Overpayments: The facility lets you make extra payments towards your debt meaning less interest to pay and once again a shorter loan term. This means your property will be yours outright far sooner.
Redraws: The redraw facility lets you borrow back money you've made in overpayments to your debt. If you've made $5000 in overpayments and needed to borrow $3500 to pay for a new family car, the additional borrowing is just tagged back onto the overall debt and interest charged in the normal way.
Although you should only use this facility if you need to, it's can be a useful and cost effective way of borrowing money safely.
Pros and cons
So what are the pros and cons of a variable rate investment home loan? Let's take a look.
- The initial rate of interest is often quite low. This keeps your repayments down for the first few years of ownership. It's the first year or two of property ownership which is the most expensive so this can be a very useful benefit.
- If national interest rates fall your repayments will follow. This gives you the option to free up some extra monthly cash, or to make additional repayments to reduce your loan term and overall interest.
- Plenty of extra features which give you the chance to save money and get clear of debt before term.
- You aren't protected from sudden spikes in interest rates. If economic uncertainty caused rates to shoot up your monthly repayments could rise significantly.
Variable rate investment home loan comparison
An important part of finding the right home loan is comparing a range of loans on the market.
Tips from the professionals
Things to watch out for
Beware promotional offers: Lenders can offer a low rate period for the initial period of your loan. These are designed to entice you to take a loan and although you would benefit from lower repayments for a while you could find your rate skyrockets at the end of the special promotional period.
Get pre-approval: It's a good idea to get pre-approval for a loan before you start looking for properties. This way you'll know how much you can borrow and can keep your eye on properties within your budget. Pre-approvals normally last for up to six months so you have plenty of time to find the perfect investment.
Set your repayment frequency based on your wage: If you're able to choose how often you repay your loan try to set it up to coincide with your wage. That way you'll always know the money is in your account to cover your home loan.
Make regular overpayments: If you have the option to make overpayments, use it. The more you can overpay the less interest you'll pay over the life of the loan.
Set-up a direct debit: By setting up a direct debit your loan repayments will be taken automatically. That way there's no chance of forgotten payments. Missing a home loan repayment can leave a serious dent in your credit score, so take every precaution to make sure it doesn't happen.
Interest is calculated daily: Many lenders calculate interest every day. This means you'll benefit immediately from any overpayments you make.
Interest-only can save your cash flow: If you run into times when you need to lower your monthly repayments see if your lender offers an interest-only option. Your repayments will drop, but be aware you're not paying down any of the loan capital it will cost you more long term. Repaying a home loan interest-only should always be a short term strategy.
Remember to compare your options
If you want flexibility and the ability to repay your loan in the way that suits you, a variable rate investment home loan is the solution. Remember your repayments could rise as well as fall, but with the benefits of a long term fix completely dependant on national rates the risk is relatively small.