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- Option to add an offset for 0.10%
- No monthly or ongoing fees
- Unlimited redraws
Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of February 21, 2023.
Investment home loans
Whether you’re purchasing your first investment property or your third, you’re going to need an investment home loan to get you there. Investment home loans are a type of loan that allows investors to purchase a property with the sole purpose of making money off it by renting it out.
Investment home loans function in pretty much exactly the same way as an owner occupier home loan does. The only difference is that unlike an owner occupier home loan, you can only apply for an investment home loan for your investment property.
Types of rates for investment home loans
When you take out an investment loan, you’ll choose between a fixed interest rate, variable interest rate, or a split loan. Here are the three most common types of rates you can choose from when you're buying an investment property.
Fixed home loans
A fixed home loan is where the interest rate is fixed (meaning it won’t change) for a set period of time, usually between one and five years, though some lenders may have longer fixed term periods of up to 10 years. Fixed loans can be favourable if you want to lock in your repayments at a specific interest rate, so you have repayment certainty for the first few years of owning the property.
Variable home loans
A variable home loan means the interest rate will move up or down over the loan term. Interest rate movements can happen at any time at the discretion of the lender, but most commonly occur in line with changes to the official cash rate set by the RBA.
Split home loans
A split rate is where a portion of the rate is fixed and the other portion is variable. This isn’t always a 50:50 split - it could be an 80:20 split or a 60:40 split - whatever is agreed upon by you and the lender.
For example, if you are borrowing $600,000 you may choose to fix $400,000 and keep the remaining $200,000 on a variable rate. Split loans allow you to hedge your bets by taking advantage of both types of interest rates. If interest rates fall, having more of your loan as variable means you get to reap the rewards of falling rates. Similarly, having a bigger portion of your loan fixed could benefit you in a rising interest rate environment.
Types of repayments for investment home loans
There are two repayment types for investment mortgages: interest-only and principal-and-interest repayments.
Principal-and-interest
With this repayment type, you pay off the amount you’ve borrowed (the principal) and the interest together. Principal-and-interest (P&I) repayments allow you to reduce your debt more quickly because you’re paying off the amount you’ve borrowed as well as the interest. However, principal-and-interest repayments are not tax-deductible.
Interest-only
As the name suggests, you’re only paying off the interest portion of the loan with this repayment type, which means the overall repayments are smaller than a principal-and-interest loan.
Interest-only loans are popular investment properties because the interest is tax-deductible. Interest-only loans are generally available for between one and five years before the loan reverts back to principal-and-interest repayments.
What are the eligibility requirements for an investment home loan?
Applying for an investor home loan is very similar to applying for any other kind of home loan; the lender will want to get a full picture of your financial situation which means going over your credit history, bank statements, income, expenses, assets and debts with a fine tooth comb.
Here are some important things to note when applying for a loan on investment properties:
- You’ll need a bigger deposit. Low-deposit investor loans are tough to come by and you’ll often need to stump up a deposit of 20% or more of the property’s value. The deposit can be made up of savings or the equity you own in another property. Some lenders may allow investors to borrow up to 90% or even 95% of the property’s value with Lenders Mortgage Insurance (LMI) .
- Higher interest rates. Investor home loans usually have higher interest rates than owner occupier loans because investment loans are seen as being a riskier loan.
Because lending rules are generally stricter for investment home loans, investors will need to prove that they will earn enough income from their employment to cover the cost of repayments. Other sources of income like rent from other investment properties can also be included, but many lenders will only partially include these forms of income as they’re typically less consistent and reliable than a wage or salary. It’s important to note that lenders generally won’t take into account the income you hope to receive on your property investment because you still need to be able to afford the loan if the property is untenanted for periods of time.
How do I compare investment home loans?
Investing in property could be a good financial asset especially when it is planned out thoroughly from the beginning. Comparing loans is what buyers should do to find the lowest home loan investor rates available in the market.
To compare investment property loans, investor should look for the following:
- Competitive interest rate. Just because investment home loan interest rates are generally higher than owner occupier rates, it doesn’t mean there aren’t good deals to be found. A lower interest rate means lower repayments, and if you’ve got an interest-only loan, that interest is tax-deductible which makes your loan even cheaper.
- Low fees. Mortgage fees on investment home loans are generally tax deductible, but you should still look out for an investment loan with low/no fees where possible.
- Loan features. Savvy investors know how important it is to look out for a loan packed with features like a redraw facility, offset account, and the ability to make extra or more frequent repayments to pay the loan down sooner if that’s part of your investment strategy.
- Loan type. You need to consider whether you want a fixed or variable loan as well as the repayment type - principal-and-interest or interest-only?
Owner occupier home loans and investor home loans
An owner occupier home loan is a loan that can only be taken out by those who are buying a property to live in, while an investment home loan can only be taken out by investors purchasing a property to rent out.
Investor home loans are more likely to have features like a redraw facility, offset account, ability to make extra repayments, or even switch to interest-only repayments for a limited time.
However, the lending criteria for investment home loans is generally tighter than for owner occupier loans because investors can be seen as riskier borrowers. This also means investor loans can attract higher fees and interest rates.
Frequently Asked Questions
Investors can use the equity in their home as a deposit on their investment property. The current property then becomes a security on the new debt.
Investment home loans generally have higher deposit requirements than owner occupier loans. Typically you’ll need a 20% deposit for an investment loan but some lenders may allow a smaller deposit with Lenders Mortgage Insurance (LMI).
Investment home loans generally come with more features and benefits that are useful to investors. Savvy property investors should look for the following features when comparing investment loans:
- Redraw facility
- Offset account
- Ability to make extra repayments
- Ability to make interest-only repayments for a period of time
- Repayment holiday
- Choice of repayment frequency
While investment property loans work just the same way as owner-occupier loans, they have higher interest rates because of its riskier nature.
Lending rules are also stricter for property investors, as they will need to provide proof that they earn enough income to cover the repayments not just of their investment loan but also their owner-occupier loan if they are still paying for their main residence.
Capital gains tax exemptions are only available to sold properties that served as a principal place of residence. Since investment properties are used to generate income, it will not qualify for any exemptions.
However, there is a special rule that exempts a rental property if it is sold within six years from being converted from a principal place of residence. Take note, however, that this will only hold if you do not own another main residence during the time that the property is rented out.
While you generally can’t avoid capital gains tax when selling your investment property, you can definitely employ strategies to minimise it.
The best way to minimise your CGT is to keep accurate records so you can claim for more in your cost base. Any capital costs you incur would be added to your cost base, which will substantially lessen the capital gains taxable.
Furthermore, you must maintain ownership of the investment property for at least one year to automatically get a 50% discount.
Owning an investment property entitles you to a range of tax deductions that can boost your working capital. According to the Australian Taxation Office (ATO), landlords can only claim deductions on their rental properties during periods when it was tenanted or genuinely available for rent.
Some of the deductions you can claim are property taxes and insurance, mortgage interest, management fees, council rates, and repair costs. This checklist of expenses will show you which ones you can claim when you file your annual taxes.
Yes, investing in property can be financially rewarding as it can be seen as a viable way to build wealth. However, it has its own pros and cons.
One of the biggest upsides of an investment property is having a steady flow of passive income in the form of rent. In many cases, an investment property pays for itself, as rental income can be used to settle mortgage payments and other expenses.
Property investors can also take advantage of tax benefits, allowing them to maximise their returns.
Overall, investing in property is a long-term investment strategy — as time goes, you would be able to improve your cash flow and build enough funds to expand your portfolio.
However, the biggest drawback of investing in property is its high entry cost — a mortgage deposit can cause thousands of dollars.
Furthermore, property is not as liquid as other asset classes like stocks — it will take a longer time to sell it if you need quick access to cash.
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