Whether you’re on the hunt for your first or fifth investment property, it can feel challenging knowing which home loan is the right fit for your investment goals. Luckily, there are key factors you can compare that will put you on the right path to your best investment home loan.
It’s important to remember that every investor’s goals are different and unique to their specific financial situation and budget. For example, if your goal was to pay off your investor mortgage as quickly as possible, you may opt for a principal and interest loan that allows for extra repayments. Comparatively, if you intended on flipping a property and wanted to keep expenses low, you may consider an interest-only loan with a low rate and low fees.
All these scenarios come into play when you’re looking into which home loan would best suit your investment property needs in Australia. So, let’s explore what to look for in an investment home loan, some of the biggest costs that can eat away at your return, and how to keep your investor home loan affordable.
Common investor situations and which home loans may suit best
The flipper – You’re looking for low expenses and high returns in a short window as you renovate a property to sell at a profit. It may be worth looking at a low-rate, no-frills interest-only loan. Depending on the market, you could consider fixing your rate over this interest-only period to ensure your repayments don’t change for ease of budgeting.
The lifelong investment – You want to add property to your portfolio and earn a rental income from rent paid by your tenants. You know that once your home loan is paid off this passive income will only grow. You may want to prioritise a home loan that helps you chip away your principal owing as quickly as possible, such as a principal and interest home loan with features like extra repayments, an offset account or a redraw facility.
The refinancer – You currently have an investment property loan but you’re looking to find a better deal. Whatever your reason for refinancing, you may find that you want a home loan that rewards you for switching, such as a low refinancing rate home loan, or a cash back refinance home loan.
What to look for in an investment home loan
There are a multitude of factors that make up a good Australian home loan, all of which can play a significant role in determining the overall cost and flexibility of the mortgage. Even if you have an existing mortgage with one bank or provider, it does not necessarily mean that it is the best fit for your investment property.
About – A significant factor that determines the ongoing cost of the loan. This is the rate a lender will charge on top of your principal owing. The lower the rate the lower your mortgage repayments.
What to consider – If your focus as an investor is to keep expenses as low as possible, it may be worth comparing no-frills, basic low interest rate options. However, if you want to take advantage of any features, like an offset account or the ability to make extra repayments, these may come with higher rates. Keep in mind that investor interest rates are often higher than owner-occupier rates, as there is greater risk to a lender that an investor may default, compared to a borrower that lives in the home.
About – There are a number of fees a lender may charge for the privilege of having an investment home loan, including upfront fees like loan application fees, ongoing fees like annual fees, and exit fees. The more fees you pay, and the higher the fee, the greater your expenses and the more you’ll eat away at your rental yield.
What to consider – Almost every investor will be looking for ways to avoid paying excessive fees on their home loan, so factoring fees into your comparison is worthwhile. That being said, more flexible home loans with features may include some ongoing fees, like an annual fee, to help cover the cost of these perks. It may be worthwhile looking at the comparison rate as well, as this offers a broader picture of how much a loan may cost. It factors in the advertised rate and many of the fees, based on a 25-year, $150,000 loan.
Interest rate type
About – Choose between a fixed rate home loan, in which your interest rate is locked in for a fixed period of time (typically 1-5 years) or a variable rate home loan, which is subject to market fluctuations, but may be more likely to come with features.
What to consider – Just as you will research the property market before choosing your investment property, you should research the interest rate market before locking in a rate type. Playing the rate game well could help you to lower your mortgage repayments. If the cash rate, and interest rates in turn, are set to rise, it may be worth looking for a lower fixed rate loan option before prices go up. If rates are set to fall, you may want to opt for a variable interest rate loan that will decrease your repayments as the cash rate drops. Keep in mind that interest charged on a mortgage is often tax deductible for investors.
Loan repayment type
About – The type of loan you choose also plays a role in its cost. Choose between paying principal & interest, in which you chip away at the loan amount and repay interest, or interest-only, in which you only pay interest charges for a set period.
What to consider – If you’re looking for a short-term investment, keeping your immediate expenses low, by opting for interest-only repayments, could be worth considering. In fact, it is a popular investment strategy for home flippers looking to keep costs low and maximise capital growth. However, if you do not sell the property in this interest-only window, you’ll revert to paying principal and interest. Your repayments will now be even higher than they could have been, as you have not chipped away at your loan balance and have simply just reduced your loan term.
About – Home loan features can be a handy way to gain more flexibility with your investment mortgage. This can include the ability to make extra repayments without penalty, use of an offset account(s), a redraw facility, or splitting your home loan repayments between fixed and variable rates.
What to consider – If you will likely be paying off your investment home loan for the next 20-30 years, having access to features may come in handy, depending on your goals. If you want to pay down your debt faster, for example, being able to make additional repayments could be useful. That being said, some lenders may charge higher rates or fees for the benefit of having these features, so compare your options carefully.
Cash back offers
About – A generous perk offered by lenders to entice borrowers to sign up with them. This can range from $2,000 – $10,000, depending on the property value. It may be offered as a lump sum payment, a reduction to your loan amount, or as a gift card.
What to consider – These generous offers are typically reserved for refinancers only, assisting in the cost of switching lenders, or paying for a new appliance for the property. However, unlike most competitors, Reduce Home Loans also offers cash back deals on new purchases as well.
What are the costs of an investment property?
One thing that is universal between all property investors (and homeowners) is the need to keep expenses down where possible, and maintain smooth cash flow. If you are a first home buyer, it’s important to be aware of all the costs associated with purchasing your investment property – not just the home loan costs.
- Lender’s Mortgage Insurance (LMI) – Can cost tens of thousands of dollars, depending on the property value. Will be charged if your deposit does not equate 20% of the property’s value.
- Stamp duty – An unavoidable pain, stamp duty can also cost tens of thousands of dollars. Many state and territory stamp duty exemptions and concessions are reserved for owner-occupiers as well.
- Conveyancing fees – These are the legal fees paid to a professional for their assistance in helping you purchase property, transfer a title into your name, and take out a home loan.
- Inspections – Some sellers will perform their own building and pest inspections, but it’s generally recommended to pay for independent inspections yourself. You may also want to pay for your own valuation for the property before applying for a mortgage.
- Mortgage registration – Each state and territory will charge borrowers a fee (around $100 – $200) for the privilege of registering your new loan, generally paid in the settlement period.
How to keep your investment home loan affordable
The best way to ensure your investment home loan is affordable, and the right choice for your financial situation, is to compare your options carefully. There’s no use just sticking with your childhood bank if you want to cross your t’s and dot your I’s that your home loan will be the best in the market for your needs.
Using the factors listed above, take stock of what you want to prioritise in your investment property home loan. Then consider looking at a range of options, and comparing potential loan repayments with a Mortgage Repayment Calculator, to see how it may suit your budget.
If you’re looking to prioritise a competitive interest rate and the flexibility of helpful features, it may be worth comparing Reduce Home Loans investment property mortgages. For example, the Investor Rate Slasher comes with a competitive interest rate, and a loan-to-value ratio (LVR) minimum of 90%. You will also gain access to an offset account, a redraw facility, and the option to split your rate.
So, what are you waiting for? Take the first step in securing your investment property home loan, and contact our helpful team at Reduce Home Loans today.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.