My mortgage broker suggested I go on an interest only investment property loan as it would keep down the costs, and the interest can be claimed at tax time.— Matt Corke, Head of Publishing Ventures
Updated
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Property investors should consider the following when finding the ideal mortgage:
My mortgage broker suggested I go on an interest only investment property loan as it would keep down the costs, and the interest can be claimed at tax time.— Matt Corke, Head of Publishing Ventures
An investment loan is a mortgage investors use to buy investment properties. Investment loans have higher interest rates than owner-occupier loans because lenders view investors as riskier borrowers.
Investors can choose fixed or variable repayments. Variable rate loans are easier to pay off faster or refinance without an exit fee and are currently lower than fixed rate loans.
But a fixed rate loan lets you lock in an interest rate and forget about rates rising. There's also the option of splitting your loan into fixed and variable portions.
Most owner-occupier borrowers choose principal-and-interest repayments. You borrow money and pay it back, plus interest. Investors can do this too. But they have another option.
Interest-only investment loans start with very low repayments because you're just paying the interest charges. These loans cost you more in the long run. But they let investors maximise their tax-deductible debts in the short term.
As an investor, most expenses related to owning and maintaining your investment property are tax-deductible.
This includes your loan fees and your loan interest charges. If your investment costs you more than it generates in rent, you can offset the cost by reducing your tax bill.
On 19 March the official cash rate held at:
4.35%
The lowest investor loan in Finder's database is:
6.19%
With this rate, assuming the average investor home loan size of $574,217 you would be making monthly repayments of:
$3,514
Lenders treat investment properties as higher-risk purchases, which means it can be more complicated to get an investment loan approved.
Here are 6 tips to make your investment loan application a success:
A 20% deposit is a big ask, but it makes you a less risky borrower (and lets you save on LMI).
A quick check of your credit score is always a good idea. Sometimes there are red flags or errors you might not have noticed. If it's not in great shape, it's time to start improving it.
Cutting back on unnecessary purchases in the 3 months leading up to your application boosts your chances of approval.
Every lender has different eligibility criteria. Some may be stricter when lending to investors.
If the property you're buying looks like a riskier investment due to its size, property type or location, the lender might reject your application.
A qualified broker can help match you up with a bank or lender whose policies and criteria best suit your personal situation.
Lenders use your property as security. If you can't repay the loan then your lender has to sell the property to recover its debt.
"Assuming a lender will accept every property is a mistake," buyer's advocate and property investment adviser Cate Bakos told 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.
"If a lender already has too many borrowers investing in similar property types to yours in the same postcode it may reject your application. This reduces the lender's exposure to risk."
Property investment can be both risky and rewarding. Here are some of the potential risks and benefits you should think about:
Common wisdom is to opt for an interest-only investment loan so you maximise your tax deductions. And it's a sound approach. The only exception is if you have already paid off the mortgage on your own home. This is not tax-deductible. At that stage, consider going principal and interest and throwing all the money you can at that investment loan to create a debt-free source of income in retirement.
Nicole Pedersen-McKinnon
Freelance finance journalist
Investing in property allows Australians to build investment wealth in 2 ways:
Many investors ideally want to purchase properties that offer a consistent rental income and a high capital growth over time.
But investors in Australia have a big tax advantage: negative gearing. Even if your investment costs outweigh the rental returns in a financial year, you can use the loss to shrink your tax bill.
"Property investment is a game of finance with some houses thrown in the middle," Metropole Property Strategists founder and CEO Michael Yardney said.
"Beginning investors think they can just go to any bank, get the lowest loan rate and they will be set. But 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, giving them the equity and cash flow to buy further properties."
Typically, you need a 20% deposit for a home loan but you can get a loan with less than this. While this is more likely with an owner-occupier home loan, there are also investment loans available for as little as a 5% deposit.
Every home loan is a risk for the lender. And investment properties represent a greater risk. An owner-occupier with no other mortgages is a pretty safe bet. But an investor is speculating on the market. They may have their own mortgage too. An investor needs to cover their own mortgage, find a tenant to pay rent and cover the investment loan repayments.
As of May 2024, the average variable rate investment loan in Finder's database is 7.50%.
In Australia most borrowers, whether homeowners or investors, save a deposit of around 20%. Some lenders are reluctant to lend to an investor unless they have a 20% deposit, but it's definitely possible to buy an investment property with a 10% deposit. You could go lower, but there are fewer loan options if your deposit is 5%.
When your deposit is under 20% you also need to pay LMI. This can cost you thousands or even tens of thousands, so be sure to factor that in when looking to buy an investment property.
Loan to value ratio (LVR) means the minimum deposit required for a home loan. Many borrowers save 20% deposits, but you can get a home loan with a deposit as low as 5%.
This is true for investment property loans too. But there are fewer investment loans with low-deposit options available. Most investors will need at least a 10% or 20% deposit.
In Australia, all home loans come with 2 rates: the interest rate and the comparison rate. This includes investment loans. 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 and don't provide specific details about your own potential costs. While a comparison rate is helpful, you're better off looking at the loan fees in detail for yourself.
There's no limit on how many investment properties you can buy or how many loans you can take out. But you do need to be in a strong financial position to get multiple loans to buy multiple investments.
If you tried to buy a string of investment properties with 5% deposits, lenders would likely knock you back and your credit score would drop. But if you bought one, paid off a good chunk of it and had steady rental income, you could be in a position to finance a second investment – especially if the value of the first one has risen.
It's a really good idea to talk to a broker if you're trying to finance multiple properties.
As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Daily, Studio 10, nightly news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media.
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