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.