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:
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.
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.
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:
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.
|Product||Interest rate||Comparison rate||Total interest & fees payable||Monthly repayment example*|
NAB Base variable
Flexi First Option
Extra Home loan (80% LVR)
Achieve Variable (property value $250,000 to $499,000)
Investment property home loans structure repayments in one of two ways:
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.
With this type of loan you make repayments to reduce your principal as well as payments for interest. With a principal and interest loan:
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.
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:
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.
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:
A property is making a loss if the costs of owning and maintaining it exceed 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 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:
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.
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:
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 loans often have higher interest rates than normal home loans, but not always.
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:
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
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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