How choosing a variable rate investment loan can help you maximise your property portfolio.
If you're looking to build your property portfolio, you'll need an investment home loan. There are a wide range of home loan products for investors, and it can be difficult to sort through them unless you know how to compare one to another. Read on to find out why a variable rate investment loan could be a good option for you, and find out how to compare them.
Compare Variable Rate Investment Home Loans
What is a variable rate investment home loan?
A variable rate investment home loan is a home loan designed specifically for property investors. The interest rate can change at any time, depending on a variety of factors. Lenders change interest rates based on cash rate moves by the Reserve Bank of Australia, funding costs and competitive pressures.
Because the rate can change at any time, this means your repayments can also change at any time. This is why it's important for you as an investor to budget wisely to ensure you can continue to meet your repayment obligations should interest rates rise.
Investment home loans are slightly different from owner-occupier home loans in that they often carry higher interest rates and tougher credit criteria. Lenders often charge a higher rate for investment loans because investors are seen as a riskier category of borrowers. Moreover, Australia's banking regulator, the Australian Prudential Regulation Authority (APRA), has limited the amount of investment loans that banks can give out to 10% of the bank’s new lending business.
However, investment home loans can also afford you greater borrowing power than owner-occupier home loans. When lenders calculate your income as an investor, they'll take into account a portion of the rent that you're likely to receive from your investment property. By adding this rental income to your regular income, you may be able to borrow a larger sum than you could as an owner-occupier.
Why choose a variable rate investment home loan?
When you're choosing an investment property home loan, one of the first decisions you'll have to make is whether you want a variable rate or fixed rate mortgage product. There are benefits and drawbacks to either structure.
Variable rate loans often have lower rates than fixed rate products. This can save you money on repayments, particularly if you choose interest-only repayments.
Interest-only repayments allow you to repay only the interest portion of your home loan for a set period of time, usually up to five years. Many investors choose this structure due to the tax and cash flow benefits. Interest on an investment property home loan is tax deductible. By choosing a low variable rate investment home loan on interest-only repayments, you can maximise both your cash flow and your tax deductible debt.
Variable rate investment loans also tend to offer more flexibility. Variable rate home loans generally allow you to make as many additional repayments as you like without penalty. This can help you get ahead on your repayments and, if you're making principal and interest repayments, allow you to pay off your home loan quicker.
What are the downsides?
The downside of variable rate home loans is that your rate can change at any time. This can make budgeting difficult, particularly for investors counting on a certain level of rental income to meet their home loan repayments. Many fixed rate investment home loans allow investors to pay interest up to 12 months in advance, maximising their cash flow for the remainder of the year. Variable rate home loans don't offer this option.
How do I compare variable rate investment home loans?
Sorting through the variety of variable rate investment home loans on the market can be daunting, but if you know what you're looking for, you'll be better able to compare your options and find the right loan for you. You should compare variable rate investment home loans based on:
- Interest rate. The interest rate is the primary indicator of how much you'll actually end up paying for an investment rate home loan. A low interest rate means lower repayments, which will help minimise the expenses associated with your investment property and maximise your cash flow. A slight change in interest rate can make a big difference to your repayments. For example, a $500,000 interest-only home loan at a rate of 4.25% would put your monthly repayments at $1,770.83. The same home loan at a 4.00% rate would see your repayments drop to $1,666.67.
- Fees. Ongoing fees can eat into the value you get from a low variable rate. Some home loans carry monthly or annual account-keeping or administrative fees that don't show up in the headline interest rate. This is why it's always important to pay attention to the comparison rate. The comparison rate takes into account the fees associated with the home loan combined with its headline interest rate and expresses this figure as a percentage. The comparison rate often gives you a much better idea of a home loan's true value.
- Features. Some home loans come with handy features that can help you better manage your mortgage. For example, offset accounts can save you on interest payments by reducing the amount on which interest is charged by the amount in the account. Redraw accounts allow you to access any extra repayments you've made on your loan should you need a quick cash injection. As mentioned before, home loans that offer interest-only repayments allow you to maximise your tax deductible debt while minimising your expenses. Flexible features can be an important factor in choosing an investment property home loan.
A variable rate investment loan could be the right option to help you build up your property portfolio. Be sure to thoroughly compare home loans to make sure the investment loan you get works for you.