How to compare investment home loans
Interest rate and fees
Interest will be the main cost of your investment loan, followed by loan fees. While both of these costs may be tax deductible for some investors, a competitive interest rate and low fees will reduce your overall investment costs and free up cash to use or invest elsewhere. If you’re paying more, ask the lender what you’re getting in return to justify the cost.
Your LVR
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).
Repayment flexibility
Being able to pay out the loan early without penalty can be valuable, particularly for investors (e.g., if you sell your property for any reason). 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.
Loan structure
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 Michael.
Useful loan features
A home loan with an offset account can be valuable for property investors. 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.
Fit with your investment phase
Is your portfolio in a growth or mature phase? Depending on where you're at, you may want different things from a loan. A common requirement is maximising borrowing capacity in the growth phase, versus keeping costs as low as possible for a more mature portfolio.
Rafi found the right loan for an investment property with Money.com.au
Rafi from Sydney
“We needed help to find the best option and bank to purchase a new investment property through our SMSF. Our Mortgage Broker, Debbie Hays, was great in comparing loan options and finding the most suitable one for us. She explained everything clearly and made the whole process simple. We ended up with an SMSF loan that included an offset account, which was hard to find. We’re really happy with the outcome.”
Rafi from Sydney
Which lenders are more likely to approve your investment loan?
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 (39%) and AMP Bank (38%) are two lenders that show a notable swing towards investment loans. By contrast, ING shows a strong preference for owner-occupier loans, with only 24% of investment loans on its book. Australia’s big four banks all lend to investors at similar levels (roughly 33-35% of their total loan book).
Regional banks (e.g. Bendigo Bank) tend to have a more conservative approach to investor lending.
Investors should consider a multi-lender approach
Michael Burgess, Money.com.au's Senior Mortgage Broker
“You need to choose the right lender for each property. This may mean, for example, going with different lenders for your principal place of residence and investment loan. Then, if you grow your portfolio, it’s also worth considering the best lender for each additional property. We shop lenders based on the loan fundamentals, plus factors like the property valuation lenders will offer and how they treat rental income when assessing the application. All of these factors matter."
Michael Burgess, Money.com.au's Senior Mortgage Broker
Types of investment home loans
Principal & interest (P&I) investment 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 each month. Your loan principal decreases over time and your equity increases.
Your repayments are higher than they would be if you were to choose interest-only repayments. 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 on the loan for a period of time (usually 1-5 years but it can be up to 10 years with some lenders). You'll haves lower repayments initially but they'll increase 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?
Some 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 to 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.
But our Senior Mortgage Broker, Michael Burgess, says interest-only isn't always the right approach for investors.
“A lot of investors assume interest-only automatically improves borrowing power, but that’s not always the case,” he says.
“For investors in growth mode, principal and interest repayments can sometimes make it easier to keep borrowing and expanding their portfolio.”
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 home 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 investment 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
An SMSF loan is specifically designed for investors purchasing a property through their 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 Michael.
“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. Bank Australia, Commbank, loans.com.au and 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 are stricter. 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 example, if you have a line of credit with a limit of $50,000, but you only withdraw $20,000, interest would only be charged on that $20,000.
Offset account versus redraw on investment loans
For investment loans, a redraw facility and offset account both allow borrowers to save on interest using excess cash, while still maintaining access to that cash. The average home loan interest rate is higher for investors, making these features particularly appealing.
Many 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.
Here’s how they each work in a nutshell:
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.
Documents you need for an investment home loan application
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:
- Proof of income (e.g. salary or rental income if you own other investment properties)
- Proof of expenses (e.g. bank statements)
- Proof of assets you own (e.g. any other property)
- Proof of liabilities (e.g. loan statements)
- Proof of identity
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:
- You have at least a 10% deposit or equity in another property.
- You don’t have very high levels of existing debt relative to your income (debt-to-income ratio).
- You don't have major issues in your credit history, although even if you do, some lenders offer bad credit home loans.
- You apply with the help of a mortgage broker, particularly if you’re a first-home buyer investor, or your situation is complicated.
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.
The type of investment property and its location matter for lenders
Michael Burgess, Senior Mortgage Broker at Money.com.au
"Lenders are wary of approving an investment loan for anything that's going to be hard to rent out or hard to sell. So if the property is in the middle of nowhere, or on a very large block, with limited buyers or renters, that could be a problem. High density dwellings can be an issue too, as they're often worst affected in terms of buyer and renter demand if there’s a downturn."
Michael Burgess, Senior Mortgage Broker at Money.com.au
What tax deductions are available to property investors?
Tax deductible
- Interest on your investor loan
- Loan establishment & valuation fees
- Stamp duty charged on the mortgage
- Title search fees, if charged by your lender
- Costs (including solicitors fees) for preparing and filing mortgage documents
- Mortgage broker fees
- Lender's mortgage insurance (LMI)
Non-tax deductible
- Your loan principal
- Stamp duty charged by your state/territory government (except in the ACT, where stamp duty is immediately deductible because property purchases are on a leasehold basis rather than freehold)
- Legal expenses including for the purchase of the property
- Borrowing expenses on any portion of the loan you use for private purposes
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.
