Home loans
Compare interest-only home loan rates
By Sean Callery
See some of the top investment home loan rates, starting from 4.99% (6.15% p.a. comparison rate^)
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Investor loans are growing quickly, up 19% in September 2024 compared to the previous year. Construction loans are leading the charge, though loans for land and new homes have slowed a bit. Queensland has become Australia's second-largest investor market, just surpassing Victoria. The Sunshine State now holds 23.4% of the investor loan market, trailing only New South Wales. The average investor home loan is $654,056, with an interest rate of 6.27% p.a. As for competition, it’s the smaller lenders making a push, with non-major banks now holding 26.4% of the investor market.
Average investment home loan amount
$654,056
Average investment loan interest rate (new loans)
6.49%
Annual investor loan growth in new loan numbers (Sep 23 - Sep 24)
19%
Percentage of investor market share for non-major banks
26.4%
Percentage of Australians who support negative gearing as an investment strategy
36%
Sources: Money.com.au, ABS, RBA
An investment loan is a mortgage you can take out to buy an investment property, whether it’s land, a unit/apartment or a house. Property investors commonly use an investment loan to finance a property purchase, and then use rental income earned from the property to cover the loan repayments.
Here’s a quick rundown on how investment home loans work:
How investment loans are different
Investment property loans work in more or less the same way as home loans used for a property to live in, with two key distinctions:
Rebecca Jarrett-Dalton, Mortgage Broker
“Banks consider only a portion of your rental income (not the full amount) when calculating your borrowing capacity. It’s usually 80% of the rental income from your investment property to account for vacancy rates, depending on the lender. They then deduct property-related expenses and apply a buffered assessment interest rate to evaluate your ability to repay the loan.”
Rebecca Jarrett-Dalton, Mortgage Broker
According to banking regulator, APRA, Australia’s biggest 10 banks lend twice as much to owner-occupiers as they do to investors. But some banks have more of a preference for investor loans.
Macquarie Bank shows a notable swing towards investment loans, making up 38.52% of its property lending. By contrast, ING shows a strong preference for owner-occupier loans, with only 16.27% of investment loans on its book. Of the big four banks, NAB has the highest proportion of investment loans.
Regional banks (e.g. Bendigo Bank) tend to have a more conservative approach to investor lending.
Peter Drennan, Money's Research & Data Expert
“The data shows that each lender has a preference for loans, and are likely actively balancing their loan book using rates to entice new customers. It also shows that your best loan option for an investor loan might not be your best option for an owner occupied loan; so it pays to shop around based on the loan type, even if you already have a loan at a specific lender.”
Peter Drennan, Money's Research & Data Expert
Types of investment home loans
Principal & interest (P&I) home loans
This is the ‘standard’ way to pay off a loan. You make repayments to reduce your loan balance (the principal) AND to cover the interest charged by the lender. Your loan principal reduces over time and your equity increases.
Your repayments are higher than they would be if you were to choose interest-only repayment. But, you’ll pay less interest overall.
Only the interest component of a P&I loan is tax deductible.
Interest-only investment home loans
With an interest-only home loan, your repayments only cover the cost of interest charged by the lender for a period of time (1-5 years). This means lower repayments initially, but the loan will eventually revert to higher repayments later on when the principal also needs to be repaid.
Having lower payments initially means property investors have more cash available for other investments, and the payments may be fully tax deductible.
You’ll pay more interest overall.
Should you get an interest-only investment loan?
Investors tend to go with interest-only investment loans to reduce their initial mortgage repayments and free up cash flow.
Instead, the hope is that the borrower's equity in their investment property will grow due increases in the property's value. This would potentially allow the investor to release equity by refinancing to purchase another property.
But this can be risky as there is no guarantee that your property’s value will increase.
As an investor, you may also be prepared to tolerate higher interest costs in the short term because interest payments on your investment loan may be tax deductible. This could help offset the rental income earned.
Mansour Soltani, Money's Home Loans Expert
“If you’re considering interest-only, you need to know what your plan is for actually paying down the debt. Some people with more than one investment property will sell one of their properties to pay off the other debt on the others, but what if you only have one investment property? Speak to your accountant or financial advisor to discuss your exit strategy.”
Mansour Soltani, Money's Home Loans Expert
Fixed versus variable investment loan rates
Variable rate investment loan
If your investment loan rate is variable, it could go up or down at any time, and so too would your loan repayments. The potential upside of a variable rate loan for investors is it’s more likely you’ll have access to loan features like an offset account, plus the flexibility to repay the loan early without penalty fees.
Fixed rate investment loan
Your interest rate and home loan repayments will stay fixed for a set period of time (between 1-5 years). This means you won’t be impacted if interest rates go up or down. A fixed rate loan may appeal to investors looking for certainty – for example, knowing your rental income will be sufficient to cover the loan repayments during the fixed rate period.
Split rate loan Most lenders also offer the option of a split rate loan which means part of your loan is on a fixed rate and part is variable. Investors who choose a split option can decide what portion of their loan they want to fix and how much will remain on a variable rate – 50/50, 60/40, 70/30, etc.
Other types of investment loans
Self-managed super fund (SMSF) property loans
These are loans specifically designed for investors purchasing a property through a self-managed super fund (SMSF). The requirements for getting an investment mortgage through an SMSF are more complex than standard loans, but they can be appealing to some investors.
“With an SMSF loan or family trust loan, the banks don't take into consideration anything that's sitting outside the fund or trust” explains Mansour Soltani, Money.com.au's home loans expert.
“This works in reverse too, meaning if you plan to make further personal investments in future, the SMSF loan will not impact your borrowing capacity.”
‘Green’ investment property loans
A limited number of Australian lenders (e.g. Commbank, loans.com.au & Gateway Bank) offer specialised investment loans for certified energy-efficient homes.
These usually have a discounted interest rate compared to the lender’s standard investment loan rate, but the eligibility criteria for these are usually quite strict. For instance, you may be required to install approved clean energy products, such as solar panels or energy-efficient window treatments.
Line of credit investment loan
Investors with an existing property may be able to borrow extra funds for renovations or other investments by taking out a line of credit that’s secured by their existing property. This gives you ongoing access to credit up to a limit (like a credit card). Interest is usually only charged on funds drawn down.
For investment loans, a redraw facility and offset account both allow borrowers to save on interest using any excess cash, while still maintaining access to that cash. The average home loan interest rate is higher for investors, making these features particularly appealing.
Offset account
Your home loan has a linked transaction account, the balance of which ‘offsets’ what you owe on your investment loan and the interest charged on it.
Redraw facility
Allows you to make extra repayments on your investor loan and then withdraw that money again if you need it.
Mansour Soltani, Money's Home Loans Expert
“Most investors prefer an offset account because of the tax implications. Basically an offset account allows you to withdraw funds from your home loan for personal use, without it impacting any interest tax deductions. On the other hand, accessing money through redraw may limit your ability to claim tax deductions. Always speak to your accountant or financial advisor to fully understand the tax implications based on your situation.”
Mansour Soltani, Money's Home Loans Expert
Interest will be the main cost of your investment loan. While interest costs may be tax deductible for some investors, a competitive interest will reduce your overall investment costs and free up cash to use or invest elsewhere.
Like interest, loan fees may be tax deductible depending on your situation, but unless you’re getting something valuable in return for paying the fee (like access to an offset account), they’re generally best avoided.
For example, what’s your lender’s maximum loan-to-value ratio (LVR) for investment loans? Some banks will accept a 90% LVR or more. Others prefer a standard 80% LVR. Lenders use your LVR to assess the risk of a loan. To access the best investment loan rates, you generally need to be borrowing less than 60% of the property’s value (i.e. 60% LVR or lower).
Being able to pay out the loan early without penalty can be valuable, particularly for investors who plan to repay the loan early (e.g., if you sell your property). Repayment flexibility can also be useful for investors who experience an unexpected financial windfall, such as bonuses or dividend payments. This flexibility allows them to reduce their debt without penalties.
For example, do the loans you’re comparing offer an interest-only option, or the ability to split the loan between a fixed and variable interest rate? Structuring your loan correctly is crucial for investors as it can optimise your cash flow, tax benefits, and overall financial strategy, according to Mansour.
An offset account is a must for most property investors, according to Mansour. This allows you to reduce interest costs by keeping cash in a transaction account linked to your home loan and it doesn’t affect tax deductibility of your home loan interest.
How to apply for an investment home loan
Applying for an investment home loan is usually as simple as completing an application form with the lender and providing supporting information to prove you’re eligible, including:
How to get your investment loan approved
Each lender has its own eligibility rules for investment loans based on how much tolerance it has for risk. But as a general rule, your chances of approval for an investment loan may be better if:
If you can't meet the eligibility criteria for standard banks and mainstream lenders, a low-doc home loan could be an alternative worth considering.
Source: Mark Chapman, Director of Tax Communication at H&R Block. Please seek advice from a qualified tax professional to understand what expenses may be deductible based on your circumstances.
Mark Chapman, Director of Tax Communication at H&R Block
“If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less. If the total deductible borrowing expenses are $100 or less, they are fully deductible in the income year they are incurred. If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment.”
Mark Chapman, Director of Tax Communication at H&R Block
What is negative gearing and how might it affect my investment loan?
Negative gearing is when a property investor is making a loss because the costs of owning and maintaining their property (interest and other costs) are higher than the rental income it generates.
While this may sound like a bad situation, in some cases being negatively geared can have tax benefits. That’s because, according to the ATO, investors may be able to claim losses from investment properties to offset tax they need to pay on other sources of income.
If you’re new to property investment it may be a good idea to have an accountant help you with your tax return to make sure you claim deductions correctly and that your property is as tax efficient as possible.
How much deposit do you need for an investment property loan?
Mansour says he generally recommends that investors should have a deposit of at least 10% of the property's value. But it can be possible to get an investment property loan with a deposit of as little as 5%. In other words, on a $500,000 property you could potentially borrow up to 95% of the property’s value, or $450,000.
How much deposit you need will also depend on other aspects of your loan application, the type of property you’re buying, and the specific lender you apply with.
If your deposit is less than 20% of the property’s value (in other words your LVR is above 80%), you may need to pay for lender’s mortgage insurance (LMI) to protect the lender from the higher risk of lending to you. This is a big upfront cost, but is usually simply added to the loan amount and may be tax deductible.
Is an investment loan tax deductible?
Depending on your situation, interest charged on your investment loan may be tax deductible. According to the ATO, you can claim the interest charges on a loan used to:
You can’t claim interest as a deduction for any period of time you were using the property for private use.
If your property is only rented out for part of the year or if only a part of your property is rented, you’ll need to apportion your expenses to claim interest deductions that relate to the portion of the property that was rented out or to the period it was rented out. Always get advice from a qualified tax professional to understand how any tax implications may apply to you.
Do investment loans have higher interest rates than normal home loans?
Investment loans typically have higher interest rates than owner-occupier home loans, but not always.
For example, while investor loan rates may be higher overall, an investor with a low LVR who is eligible to apply with a wide range of lenders could qualify for a lower interest rate than an owner-occupier looking for a low-deposit home loan (i.e. with a higher LVR).
How long can I fix the rate on my investment loan for?
You can generally fix your investment home loan for a period of 1- 5 years.
Compare fixed rate home loans for different durations:
Can I make interest-only payments on an investment loan?
Most investment property loans feature the option to make interest-only repayments for a set period of time. However, interest-only home loans are subject to stricter credit assessments.
What are some common misconceptions about investment loans?
Taking an interest-only repayment loan makes it easier to be approved because the repayments are lower
False! It's generally more difficult to get approved for an interest-only investment loan because lenders assess your borrowing capacity over a shorter term. For example, if you apply for a 25-year investment loan with a 5-year interest-only period, lenders will assess it as a 20-year loan (your remaining P&I term). This can significantly reduce your borrowing power, according to Rebecca.
You should apply for any investment loan you qualify for
False! Your investment loan choice will depend on why you want to invest, what you want to achieve, what your exit strategy is and the type of investment property you want to buy, says Rebecca.
^Comparison rate warning
Home loan comparison rates are calculated based on a loan amount of $150,000 repaid over a 25-year term with monthly repayments. The comparison rates only apply to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees and cost savings such as fee waivers are not included in the comparison rate but may influence the cost of the loan. Check with the provider for full loan details, including rates, fees, eligibility and terms and conditions to make sure the product is right for you.
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