How do I choose the right kind of Investment loan?
When you’ve decided on an investment strategy you’ll need to make sure you’ve selected a loan that will maximise your goals for cash-flow and capital growth.
One of the first considerations for your loan is if you should select a fixed or variable interest rate.
Variable interest rates for property investors
A variable interest rate will change over time, as economic conditions cause the Reserve Bank of Australia (RBA) to adjust the cash rate. A variable rate can be good for those investors who aren’t as worried about fluctuations in their repayments and are aware how their cash flow levels can be affected by rate rises or falls.
Often, variable rate packages include extra features that allow investors to make the most of their investments. Here’s an overview of the main features:
- Interest only repayments - allow investors to lower their repayments, which can aid negative cash flow strategies or help cover costs when the property is unoccupied
Example - Lisa has a home loan repayment of $2,996 and collects $3,000 a month in rent from her tenants. Unfortunately when they moved out Lisa did not have new renters move in so she switched her loan repayment to interest only and paid $2,187 until she found new tenants.
- Offset account - allow an investor to hold savings in a separate account which will be credited towards your loan balance. If you ever need the savings for repairs or costs involved with your investment property, you can move the funds out with no penalty or fees.
Example - Josh has a home loan worth $400,000. Over the course of the 25 year loan he will pay $319,000 in interest. If he kept $50,000 in an offset account he would have saved $40,000 in interest repayments (25 year loan at 5.25%)
Additional repayments / Redraw facility - variable rate products will often let you make additional loan repayments when you have extra savings you’d like to put towards the balance of your loan. If things change in the future and you need those funds, a redraw facility will allow you to access the extra money you’ve paid.
- Loan splits - if you’re not 100% comfortable leaving your entire loan balance open to the movements of your lenders interest rate, you can absorb some of the risk of interest rate movements by splitting a portion of your loan between a variable interest rate and fixed one.
Fixed interest rates for property investors.
A fixed interest rate is a great product for investors who want certainty about their outgoing costs and want to make their budgeting as easy as possible. A popular reason why investors choose fixed rates is they can match their loan terms and products to the length of time they anticipate owning the property. One of the downfalls of fixed rate products is that they don’t offer the same product features as variable rates and making extra repayments is not possible with most products.
How should I select a Lender?
Property investors are unique in the eyes of lenders because they will be assessed on both their existing income source(s) and the potential income generated from the property they want to buy.
Although it’s great that lenders will increase an investors borrowing capacity because of potential rental income, the way lenders asses property, existing equity and your financial situation are all different.
If you select the wrong lender you may not be able to afford the investment property that matches your investment goals. It’s important to speak to a mortgage broker early in your search so they can outline and explain the lenders that will have the most competitive products for you.
If you have less than 20% deposit, you are likely to incur LMI on your loan. This can cost many thousands of dollars, and on top of stamp duty, it can push your budget over the edge.
Although many lenders are tightening their lending criteria due to the current economic environment, most lenders will still allow you to capitalise many of your upfront costs including your LMI into your loan amount.
Bear in mind that while this can reduce your upfront outlay, capitalising costs will increase your monthly commitment to the loan and place more pressure on your monthly budget.
The right loan with the right features will save you time and money
No matter how much experience you have, the range of investment loans can be daunting. We help you quickly cut through the clutter to find options that work for you.
What works for one investor might not suit another. Our experienced mortgage brokers take the time to understand your investment strategy and financial goals to find the right loan for your financial situation.Whether you're investing for tax savings, rental income or to build equity, our brokers know the loans that will help you maximise your investment.
Best of all, you don't pay a cent for our service – the lender pays us.
There's a lot to know about investments, like how to choose the right investment loan to meets your needs and goals. A good investment loan can make property investment a much smoother process.
Investment loans vary depending on what you're looking to achieve, and can be either very simple (like your standard home loan), or something more complex to help you make effective use of tax, gearing and repayments. Loan features like redraw, offset and additional repayments can also help you manage your investment loan.
Investor borrowers are the most sought after customer by banks and lenders because of their equity position and borrowing history. It's important you use this position to secure the most competitive loan for your financial position.