About investment home loans
Whether you’re purchasing your first investment property or your third, you’re going to need an investment home loan to get you there. Investment home loans are a type of loan that allows investors to purchase a property with the sole purpose of making
money off it by renting it out.
Investment home loans function in pretty much exactly the same way as an owner occupier home loan does. The only difference is that unlike an owner occupier home loan, you can only apply for an investment home loan for your investment property.
Investment loan repayment types
There are two loan repayment types: interest-only and principal-and-interest repayments.
Principal-and-interest
With this repayment type, you pay off the amount you’ve borrowed (the principal) and the interest together. Principal-and-interest (P&I) repayments allow you to reduce your debt more quickly because you’re paying off the amount you’ve borrowed as
well as the interest. However, principal-and-interest repayments are not tax-deductible.
Interest-only
As the name suggests, you’re only paying off the interest portion of the loan with this repayment type, which means the overall repayments are smaller than a principal-and-interest loan.
Interest-only loans are popular among investors because the interest is tax-deductible. Interest-only loans are generally available for between one and five years before the loan reverts back to principal-and-interest repayments.
Investment loan rate types
When you take out an investment property loan, you’ll choose between a fixed interest rate, variable interest rate, or a split loan.
A fixed home loan is where the interest rate is fixed (meaning it won’t change) for a set period of time, usually between one and five years, though some lenders may have longer fixed term periods of up to 10 years. Fixed loans can be favourable if you
want to lock in your repayments at a specific interest rate, so you have repayment certainty for the first few years of owning the property.
A variable home loan means the interest rate will move up or down over the loan term. Interest rate movements can happen at any time at the discretion of the lender, but most commonly occur in line with changes to the official cash rate set by the RBA.
Split
A split rate is where a portion of the rate is fixed and the other portion is variable. This isn’t always a 50:50 split - it could be an 80:20 split or
a 60:40 split - whatever is agreed upon by you and the lender.
For example, if you are borrowing $600,000 you may choose to fix $400,000 and keep the remaining $200,000 on a variable rate. Split loans allow you to hedge your bets by taking advantage of both types of interest rates. If interest rates fall, having
more of your loan as variable means you get to reap the rewards of falling rates. Similarly, having a bigger portion of your loan fixed could benefit you in a rising interest rate environment.
What’s the difference between an owner occupier home loan and an investment home loan?
An owner occupier home loanis a loan that can only be taken out by those who are buying a property to live in, while an investment home loan can only be taken out by investors purchasing
a property to rent out.
Investor home loans are more likely to have features like a redraw facility, offset account, ability to make extra repayments, or even switch to interest-only repayments for a limited
time.
However, the lending criteria for investment home loans is generally tighter than for owner occupier loans because investors can be seen as riskier borrowers. This also means investor loans can attract higher fees and interest rates.
What are the eligibility requirements for an investment home loan?
Applying for an investor home loan is very similar to applying for any other kind of home loan; the lender will want to get a full picture of your financial situation which means going over your credit history, bank statements, income, expenses, assets
and debts with a fine tooth comb.
But there are some important differences between applying for an owner occupier home loan and an investment home loan that are important to be aware of:
-
You’ll need a bigger deposit. Low-deposit investor loans are tough to come by and you’ll often need to stump up a deposit of 20% or more of the property’s value. The deposit can be made up of savings or the equity you own in another
property. Some lenders may allow investors to borrow up to 90% or even 95% of the property’s value with
Lenders Mortgage Insurance
(LMI)
.
- Higher interest rates. Investor home loans usually have higher interest rates than owner occupier loans because investment loans are seen as being a riskier loan.
Because lending rules are generally stricter for investment home loans, investors will need to prove that they will earn enough income from their employment to cover the cost of repayments. Other sources of income like rent from other investment properties
can also be included, but many lenders will only partially include these forms of income as they’re typically less consistent and reliable than a wage or salary. It’s important to note that lenders generally won’t take into account the income you
hope to receive on your investment property because you still need to be able to afford the loan if the property is untenanted for periods of time.
What features should you look for in an investment home loan?
Investment home loans generally come with more features and benefits that are useful to investors. Savvy property investors should look for the following features when comparing investment loans:
- Redraw facility
- Offset account
- Ability to make extra repayments
- Ability to make interest-only repayments for a period of time
- Repayment holiday
- Choice of repayment frequency
How do I compare investment loans?
When comparing investment loans, property investors should look for the following:
-
Competitive interest rate. Just because investment home loan interest rates are generally higher than owner occupier rates, it doesn’t mean there aren’t good deals to be found. A lower interest rate means lower repayments, and if
you’ve got an interest-only loan, that interest is tax-deductible which makes your loan even cheaper.
- Low fees. Mortgage fees on investment home loans are generally tax deductible, but you should still look out for an investment loan with low/no fees where possible.
-
Loan features. Savvy investors know how important it is to look out for a loan packed with features like a redraw facility, offset account, and the ability to make extra or more frequent repayments to pay the loan down sooner if that’s
part of your investment strategy.
- Loan type. You need to consider whether you want a fixed or variable loan as well as the repayment type - principal-and-interest or interest-only?
How much deposit do you need for an investment home loan?
Investment home loans generally have higher deposit requirements than owner occupier loans. Typically you’ll need a 20% deposit for an investment loan but some lenders may allow a smaller deposit with Lenders Mortgage Insurance (LMI).
Can I use the equity from my current home loan as a deposit for an investment property?
Investors can use the equity in their home as a deposit on their investment property. The current property then becomes a security on the new debt.
