Everything You Need to Know
About Investment Loans

If you want to buy an investment property, chances are you’ll need an investment loan to do it. You may have a good chunk of cash to put toward the purchase, but it’s likely you’ll still need to borrow funds to make up the difference.

Taking out an investment loan is fairly similar to taking out a home loan. You’ll go through the same process of finding the right loan product and submitting an application. The major difference is how you intend to use the property. As investment properties are generally seen as higher risk, they tend to have more strict requirements for approval and higher fees and charges than owner occupier loans.

Investment Loans vs Home Loans

A lot of the basics are the same. Both involve borrowing a certain amount over a set loan term, with interest charges and other fees that apply over the course of the loan. When applying for either loan type, you’ll have a range of options available to choose from.

Principal and interest or interest-only

On a principal and interest loan, you’ll be paying off the amount you’ve borrowed plus interest on each repayment. With interest-only, you’ll only need to pay the interest charges.

Investors will often choose an interest-only loan as it can help to lower your repayments and maximise your tax deductions, but we’ll get into what that involves a bit later. Your lender will only allow you to have an interest-only loan for a set period of time before your loan will switch to principal and interest. You can look at refinancing at that time if it makes sense for you to stay on an interest-only set up.

Fixed, variable and split rates

Much like your mortgage, your investment loan can have a fixed, variable or split interest rate. On a fixed loan, your interest rate will be locked in at a set amount for a certain period of time. If there are any market fluctuations, you won’t be impacted.

On a variable loan, your interest rate could go up or down depending on what the Reserve Bank of Australia (RBA) decides to do with the cash rate and how your lender responds. If you opt for a split interest rate, part of your loan will be fixed, and the remainder will be set at a variable rate.

As a general rule, investment loans tend to have higher interest rates than home loans. Depending on your situation and other loans you may have, you may be better suited to a fixed, variable or split rate. It’s best to get professional advice based on your finances.

Investment Loan features

Once again, just like a home loan, some investment loan products come with additional features, including offset accounts and redraw facilities.

An offset account functions like a savings account, except instead of earning interest it reduces the amount you need to pay off your loan. For example, if you have $30,000 in an offset account and an investment loan for $600,000, you will only be charged interest on $570,000.

With a redraw facility, you have the ability to withdraw funds from your investment loan to use for other purposes, but only if you have already made extra repayments ahead of time.

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Investment Loan Deposit

Lenders have to follow strict guidelines for investment lending. Unlike a home loan where you can still get approval with a low deposit, investment loans tend to have lower Loan to Value Ratio (LVR) requirements.

LVR is basically the difference between how much you’re borrowing and how much you’re putting up for a deposit. So, if you want to purchase a property worth $500,000 and you’re contributing $100,000, your LVR would be 80% as your deposit is 20% of the total. Higher LVRs of 90% or 95% mean the deposit is 10% or 5% of the total amount being borrowed.

With lenders, everything is dependent on risk. As a higher LVR means more risk, a lender will be less likely to approve an investment loan without a healthy deposit. Your investment loan deposit could come from your own savings, or if you already own property, you could access your equity.

Using your existing home equity

If you have an existing mortgage that you have been paying off for a little while, you will have built equity in the property. Equity is basically the difference between the current value of your home and how much you owe on it. If the property is worth $550,000 and you owe $340,000, your equity would be $210,000.

You can unlock the equity in your home and put the funds toward other purchases, like an investment property. One way to access your equity is to refinance. Your mortgage will be paid out and replaced with a new home loan that will cover the remainder of what you owe, and a portion of your equity will go towards your investment.

Potential tax benefits for investment properties

The ATO allows you to claim tax deductions for some of the costs associated with buying and maintaining an investment property. Some of the costs you can claim include the interest on your investment loan, landlord insurance, property management fees and more. You can also potentially claim further deductions on your investment property through depreciation and negative gearing.

When you start thinking about investing in property, it’s a good idea to sit down with a mortgage broker to go through your options. Your investment loan can have a major impact on your returns, so it’s important to make sure you have the right loan structure from the get-go. Your Perth mortgage broker can also help you get your head around all the possible tax benefits and whether or not they will apply to your situation.

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It doesn’t matter whether you’re a seasoned investor or a first timer. At Loan Monster, we’re here to help investors of all levels. We’ll take the time to understand your situation and recommend the best options for you. If you’d like to have a chat with one of our brokers, get in touch with us today. We’ll get back to you within 24 hours, even on weekends.

GET STARTED WITH
LOAN MONSTER

Are you looking to refinance? Want to buy your very first home? Need an investment property loan? We can take care of it all for you at Loan Monster. Get in touch with our team and let’s get started today.

Get started today