Investment Home Loan Rates Compared

Principal and interest 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.

Interest-only investment home loans

With an interest-only home loan, your repayments only go towards covering 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. There are higher interest costs compared to a principal and interest loan, but interest costs may be tax deductible.

An interest-only investment loan strategy typically relies on property values rising, since the repayments don't help build equity in the property. However, this can be risky because there is no guarantee that your property’s value will increase.

Compare fixed rate interest-only investment loans for different durations:

• 1-year fixed interest-only investment home loans
• 2-year fixed interest-only investment home loans
• 3-year fixed interest-only investment home loans
• 4-year fixed interest-only investment home loans
• 5-year fixed interest-only investment home loans

Investment loan rates can be either fixed or variable:

Fixed rate investment loan

Your interest rate and home loan repayments will stay fixed for a set period of time (1-5 years). This means you won’t be impacted if interest rates go up or down. A fixed rate may appeal to investors looking for certainty – for example, knowing that rental income will be sufficient to cover the loan repayments during the fixed rate period.

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.

Split rate loan

Most lenders also offer the option of a split rate loan which means part of the loan is on a fixed rate and part is variable. Investors who choose a split option have the flexibility to 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.

These are loans specifically designed for investors purchasing a property through a self-managed super fund (SMSF). The requirements for getting an investment loan 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.”

A limited number of Australian lenders (e.g. Commbank and loans.com.au) offer specialised investment loans for energy efficient homes. These usually have a discounted interest rate versus the lender’s standard investment loan rates, but the eligibility criteria for these are usually quite strict.

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 ongoing access to credit up to a limit. Interest is usually only charged on funds drawn down.

Negative gearing is when a property investor is making a loss because the costs of owning and maintaining a property (interest and other costs) are higher than the rental income the property 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.

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 of a 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 value (in other words your loan-to-value ratio is above 80%), you may need to pay for lenders mortgage insurance (LMI) to protect the lender from the higher risk of lending to you. This is a big up-front cost, but is usually simply added to the loan amount and may be tax deductible.

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).

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:

• buy a rental property
• buy a depreciating asset for the rental property (e.g. an air conditioner for the rental property)
• make repairs to the rental property
• finance renovations and extensions to the rental property, which is currently rented out, or which you intend to rent out.

You can’t claim interest as a deduction for any period of time you were using the property for private use.

Always get advice from a qualified tax professional to understand how any tax implications may apply to you.

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.

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

Most investment loans feature the option to make interest-only repayments for a set period of time. However, banks tend to be stricter when it comes to approving interest-only home loans.