If you want to buy an investment property in Australia, you’ll likely need an investment home loan. These loans function similarly to regular owner-occupier loans but there are a few key differences that you should be aware of.
In this guide to getting an investment property home loan, you’ll learn:
- How to apply for an investment loan
- How to compare investment loans
- The pros and cons of investment loans
- What negative gearing is
- What investment loan features to look out for
Choosing a good investment home loan with useful features, low fees and a low interest rate is just as important as choosing a good investment property.
How do investment property home loans work?
An investment loan enables you to buy a property as an investment. Usually, you’ll then lease the property to a tenant and receive rental income, and over time hope that the property will increase in value.
In the future, you’ll either sell the property to realise the capital gain or hold it to receive passive income to fund your lifestyle, retirement or other investments. Property investment is a great way to build your wealth and an investment loan is a tool you’ll need to make that happen.
You can estimate capital gains on the sale of property using our CGT calculator.
How to compare investment home loans
To succeed as an investor you’ll need an investment loan that is well suited to you and affordable. To find the right loan it’s always best to compare investment home loans from several lenders by doing your own research and/or using a comparison site or a mortgage broker.
When comparing investment loans you should look for:
- Useful loan features Useful loan features like redraw facilities and offset accounts can make your loan more affordable and easy to manage. Learn more about home loan types and features.
- Loan interest type You can choose between a fixed interest rate, a variable interest rate and a combination of both (split loan). What’s right for you will depend on the market at the time, and your financial circumstances. Use our home loan calculator to estimate your home loan repayments.
- Low interest rates The interest rate of your investment loan is the percentage of the loan that your lender will charge you for borrowing the money. This will be the biggest cost of your investment loan, so look for a low interest rate. Learn more about home loan interest rates.
- Low fees and flexible repayment options All lenders charge fees for investment loans additional to interest. Low fees mean a cheaper home loan and more money in your pocket.
Most investment loans require that you pay interest and make repayments toward the principal (loan amount). But you may also be able to choose to make interest-only payments. Learn more about home loan fees and repayment options.
Investment property home loan comparison
| Product | Interest rate | Comparison rate | Total interest & fees payable | Monthly repayment example* | |
|---|---|---|---|---|---|
NAB | NAB Base variable | 3.97% | 3.97% | $356,237 | $2,378 |
Westpac | Flexi First Option | 3.19% | 3.20% | $278,440 | $2,162 |
ANZ | Standard Variable | 4.99% | 5.09% | $476,204 | $2,712 |
Commbank | Extra Home loan (80% LVR) | 3.54% | 3.55% | $313,313 | $2,259 |
CUA | Achieve Variable (property value $250,000 to $499,000) | 3.11% | 3.16% | $274,508 | $2,151 |
IMB Bank | Essentials | 3.18% | 3.37% | $295,275 | $2,209 |
ING | Investor | 3.24% | 3.57% | $315,330 | $2,265 |
Interest-only vs principal and interest
Investment property home loans structure repayments in one of two ways:
- Principal and interest
- Interest-only
For the majority of investors in Australia, principal and interest repayments are a better option, but in some situations an interest-only may have advantages.
Principal and interest
With this type of loan you make repayments to reduce your principal as well as payments for interest. With a principal and interest loan:
- 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.
Because you start reducing your loan principal when you establish your loan the total amount of interest you pay will be lower than an interest-only loan.
Interest-only
Usually interest-only loans are used to reduce the cost of owning property while property values increase. The investor will then sell the property for a profit.
With an interest-only loan, you won’t make repayments on the principal of your loan - you’ll only pay interest for a set period of time (usually one to five years). This option comes with its own pros and cons:
- Repayments will be lower
- May enjoy tax benefits due to negative gearing
- Pay more interest over the life of the loan
- Pay a higher interest rate and higher fees during the interest-only period
- Can be risky - especially if property prices decrease
In the right market and with the right knowledge investors can make money using this strategy. However, there are risks. If property values decrease the investor could end up with negative equity - when their loan is worth more than their property.
Investment loan features
A good investment loan is much more than a low interest rate. Investors should look for loans with useful features that offer added flexibility and cost savings. These may include:
- Interest-only payments As discussed above, interest-only payments can free up cash flow for other investments or to pay down high-interest debt. It may also be useful as part of a negative gearing strategy.
- Offset account The offset account feature links a savings account to your home loan to reduce the amount of interest you pay. Interest is calculated based on the principal of your loan, minus the amount in your offset account. If you already have strong savings, this feature could reduce the interest cost of your loan substantially.
- Line of credit A line of credit facility allows you to withdraw a set amount from your home loan to use as you see fit, without applying for a new home loan. This feature can be very useful if you want to renovate your investment property, or if large maintenance and repair costs arise.
Negative gearing explained
A property is making a loss if the costs of owning and maintaining it exceed the rental income it generates:
- A negatively geared investment property is making a loss
- A positively geared property is making a profit
While this may sound like a bad situation, in some cases being negatively geared can have tax benefits. That’s because investors may be able to claim losses from investment properties as deductions to decrease tax payable on other sources of income. This can reduce tax payable.
You can claim a deduction for the following expenses if you incur them:
- Advertising for tenants.
- Body corporate fees.
- Council rates.
- Water charges - if the tenant doesn’t pay these.
- Land tax.
- Cleaning.
- Gardening and lawn maintenance.
- Pest control.
- Mortgage interest.
- Insurance.
- Repairs and maintenance.
- Some legal expenses.
- Depreciation on some assets.
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 every deduction you can and that your property is as tax efficient as possible.
Summary
If you want to buy an investment property, you’ll need an investment loan. These function similarly to normal home loans but have a few key differences, such as higher fees, higher interest rates and more strict credit requirements.
Your investment loan should form a key part of your property investment strategy. When comparing investment home loans look for:
- Low fees
- Low interest rates
- Useful loan features ( such as offset account, line of credit)
Some investors may also benefit from an interest-only home loan, if used as part of a wider strategy. However, because interest-only loans involve higher fees, higher interest rates and more risk - principal and interest repayments are a better option for most borrowers.
Investment property home loan pros and cons
Pros
- May have tax and depreciation benefits.
- Interest-only options are available if you need cash flow.
- You may be able to cover a portion (or all) of your investment loan costs with rental income.
Cons
- Interest rates can be higher than normal home loans.
- Fees may be higher.
- You may need a larger deposit to secure a loan.
- You will have to pay extra costs to hold the property such as tax on rental income, property management fees and more.
Investment home loans FAQ
Do investment loans have higher interest rates than normal home loans?
Investment loans often have higher interest rates than normal home loans, but not always.
How do I compare investment loans?
To compare investment loans use a comparison site, speak to a mortgage broker or do your own research by visiting each lender’s website. In general, you should compare loans by looking at:
- Interest rate and comparison rate
- Fees
- Loan features
If you’re new to investing it’s often a good idea to speak to a mortgage broker for expert advice and help to choose a home loan
Can I make interest-only payments on an investment loan?
Most investment loans feature the option to make interest-only repayments for a set period of time. However, banks tend to be more strict when it comes to approving interest-only home loans.
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Shaun McGowan
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