Property remains to be Australians’ favourite investment. It offers the security of ‘bricks and mortar’ compared to the fluctuating number of shares and commodities. For that reason, banks will lend up to 95% of the value of a property.
You can build your property portfolio without having a huge capital. With the help of the bank’s money, you can build wealth through investment property. Sounds great, isn’t it?
But before settling for an investment loan, it’s necessary to consider the factors that could affect the type of loan you choose, including interest rates, fees, costs and other features. We want to make sure that you are never in the dark about your investment loan decisions, so you can choose the right loan that works for you.
Let’s navigate the world of investment home loans starting with defining our vehicle, investment home loan.
#1: What is an investment home loan?
An investment home loan is for borrowers looking to buy a property to rent out or sell. It is a mortgage solution for property investors who are in need of funding to purchase their investment property.
There are a lot of things about investment loans that are different from other standard home loans. It requires stricter eligibility requirements and a higher loan-to-valuation ratio (LVR). This means that the investors need a larger deposit before applying for a loan. Investment loans also have a slightly higher interest rate than an average residential home loan.
#2: Loan to value ratio (LVR)
LVR is the percentage of a property’s purchase price that a lender will let you borrow.
If you have less than 20% deposit and want to borrow more than 80% LVR, you may need to pay Lender’s Mortgage Insurance. This will protect the lender (not you) if you fail to make your repayments.
Usually, a lower LVR possesses a lower risk to lenders and because of this, it has a higher possibility to qualify for lower interest rates.
#3: Types of investment loans
Investment home loans aren’t that different from regular home loans. They both give you the most usual choices between fixed and variable rates or a combination of both. Here are the loan types you can choose from:
- Variable-rate home loan
This type of loan gives you the flexibility to make extra repayments if you want to pay off your loan faster. The interest rate may vary depending on changes made by your lender.
- Fixed-rate home loan
As the name suggests, this type of loan charges you the same interest for the entire duration of the fixed-rate period. This can be useful in managing your cash flow as it provides certainty of repayments.
- Split rate home loan
Investors have the choice to split their loan between fixed and variable components. Some lenders allow you to let you fix one part of your home loan and keep the remaining portion at a variable rate.
- Interest-only loan
An interest-only loan allows you to repay the interest on the loan amount borrowed during the interest-only period. With this loan, you can enjoy the tax benefits you might be eligible for.
#4: Tax benefits
If you are renting your investment property, you can claim the expenses that you made for your property as a tax deduction to reduce your taxable income. Or if you’re selling you can claim your tax deduction on your capital gains tax. The tax deductions you can claim for an investment property include:
- Interest on the investment loan
- Home and contents insurance and landlord insurance
- Real estate agent’s commission
- Maintenance costs
- Council rates
- A decline in value of depreciating assets
- Construction costs (“capital works”)
- Travel expenses to the property to do an inspection, maintenance or repairs
#5: Investment loan fees and costs
Take the time to understand the additional costs and fees that may come with an investment loan. It will help you optimise your lending strategy.
Some investment loan costs may include:
- Establishment fees
- Lenders Mortgage Insurance (LMI)
- Administration fees
- Early exit fees
- Discharge fees
- Refinancing fees
Join our community of business-like minded professionals and learn how to create more profit, more time, and more personal wealthy.