How to choose the right investment property loan for your goals?
Introduction
When it comes to property investment, choosing the right loan is more than just about securing financing, it’s about setting the stage for your financial future. The range of options can feel daunting, but getting this decision right can make all the difference in building long-term wealth.
From maximising cash flow to growing your portfolio, the investment property loan you choose will directly impact your goals. In this blog post, we will help you navigate through the options and find the perfect loan that aligns with your strategy, so you can confidently move forward with your investment journey.
What is an investment property loan?
An investment property loan is a specialised mortgage designed for purchasing property for investment purposes, such as rental properties or properties intended for long-term capital growth. Unlike standard home loans for owner-occupied properties, investment property loans typically come with different terms, interest rates, and conditions.
One of the main differences between investment property loans and regular home loans is the Loan-to-Value Ratio (LVR). While home loans can have an LVR up to 95%, investment loans usually cap at 90%, meaning you'll typically need a larger deposit for investment properties.
Challenges of property investment in Australia
Investing in property can feel overwhelming, especially when you are facing obstacles like rising property prices, complex loan terms, and concerns about your credit score. At ZedPlus, we understand these challenges, and we are here to help you navigate through them. Here’s how we make the process easier:
Rising property prices:
It’s no secret that property prices have been on the rise, particularly with recent changes to government schemes like the Australian Government 5% Deposit Scheme. The expansion of this scheme has resulted in increased demand, as it now offers unlimited places, higher property price caps, and no income limits, making it easier for more Australians to enter the housing market.
While rising property prices may make it feel as though homeownership is becoming less attainable, the right loan strategies can help you secure the property you want, even in a climbing market.
At ZedPlus, we understand these market shifts and are here to help you navigate through them. We offer tailored loan solutions that align with your financial goals, ensuring you can secure the property you want, even in a market where prices are climbing.
Confusing loan terms:
Loan jargon and complex eligibility criteria often make the process feel more difficult than it really is. With so many different loan types and financial products available, understanding what suits your situation can be overwhelming. We simplify everything for you. Our team breaks down the terms in simple language, so you will never feel lost in the process.
Credit concerns:
Having concerns about your credit score? Many property investors feel that their credit history may prevent them from securing a loan. But we are specialise in finding loan solutions for individuals with a variety of credit histories. Whether your credit score isn’t perfect, or you have had past financial setbacks, we work with you to find the right loan that fits your needs.
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How do investment property loans work?
An investment property loan allows you to borrow money to purchase real estate for investment purposes. You will repay the loan over time, with interest, typically through regular instalments. Key considerations include:
- Vacancy Risk: If the property is vacant, you'll still need to make loan repayments without rental income.
- Additional Risks: Tenant damage and regular maintenance costs may arise, whether the property is tenanted or not.
This type of loan helps you generate rental income or capital growth, and managing risks is essential to making your investment successful.
Types of investment property loans
When it comes to investment property loans, there are several options available. Choosing the right one depends on your investment strategy and financial situation.
Let’s take a closer look at the different loan types.
1. Principal and interest loans
With a principal and interest loan, you pay both the interest on the loan and a portion of the principal amount with each repayment. Over time, as you reduce the loan balance, your equity in the property increases.
| Pros | Cons |
|---|---|
| You build equity in the property over time. | Higher monthly repayments compared to interest-only loans. |
| The loan is paid off in full by the end of the loan term. | As the principal reduces, your tax-deductible interest also decreases. |
2. Interest-only loans
Interest-only loans are the most popular choice for property investors in Australia. During the interest-only loan period, which typically lasts for 1 to 5 years, you pay only the interest on the loan, with no principal repayments.
| Pros | Cons |
|---|---|
| Lower monthly repayments, improving cash flow. | No equity is built up during the interest-only period. |
| Maximises tax-deductible interest, which is beneficial for investors seeking to reduce their taxable income. | The loan balance remains the same until principal repayments begin. |
3. Equity loans
An equity loan allows you to borrow against the equity in your existing property to purchase an investment property. This is particularly useful for property owners looking to expand their investment portfolio without needing to save for a full deposit.
| Pros | Cons |
|---|---|
| Access more funds using the equity in your current property. | Increases your overall debt level, which can raise your monthly repayments. |
| Helps you build a property portfolio faster. | If you sell the property used for equity, you may need to refinance the loan. |
4. Split loans
A split loan for proper investment combines the benefits of both fixed and variable interest rates in one loan. With a split loan, you can divide your loan into portions, with one part having a fixed interest rate and the other a variable rate. This allows you to take advantage of the stability of fixed repayments while still benefiting from the flexibility of a variable rate.
| Pros | Cons |
|---|---|
| Flexibility to balance between fixed and variable rates. | More complex to manage than a fully fixed or variable loan. |
| You can benefit from rate reductions in the variable portion. | Might miss out on larger rate reductions if the market shifts. |
| Security of fixed repayments for part of the loan. | Some lenders may charge fees for split loans. |
5. Offset accounts
An offset account is a transaction account linked to your investment loan, where the balance is offset daily against your loan balance. This reduces the interest payable on the loan, helping to reduce the total cost of the loan.
| Pros | Cons |
|---|---|
| Reduces interest costs without affecting loan repayments. | Not all loans offer offset accounts. |
| Helps you pay off your loan faster by reducing interest. | You may need to maintain a higher balance in the offset account to see significant savings. |
Considering an offset account for your loan? Understand the difference between offset accounts and redraw facilities to find the best option for your investment loan.
6. Fixed-rate loans
A fixed-rate loan offers the security of knowing that your repayments will remain the same for a fixed period, usually 1–5 years. This is a great option if you want stability and predictability in your loan repayments.
| Pros | Cons |
|---|---|
| Predictable repayments make budgeting easier. | Less flexibility if interest rates fall, as your rate is locked. |
| Protection from interest rate hikes for the fixed term. | Early repayment fees or exit fees may apply if you pay off the loan early. |
| Ideal for those with tight cash flow or a fixed budget. | Limited access to extra repayments. |
7. Variable-rate loans
Variable-rate loans have an interest rate that fluctuates with the market. These loans are flexible, allowing you to make extra repayments or pay off your loan early without incurring penalties. The downside is that your repayments may increase if interest rates rise.
| Pros | Cons |
|---|---|
| Potential for lower interest rates if the market drops. | Interest rates can rise, making your repayments unpredictable. |
| Flexibility to make extra repayments or pay off early. | Risk of increased monthly payments if rates rise. |
Trying to decide between a fixed or variable home loan rate?
Read our detailed blog on Fixed vs. Variable Home Loan Rates to understand which is best for your financial needs.
8. Split loans with offset
This option combines a split loan structure with an offset account. It allows you to divide your loan into fixed and variable portions, while also benefiting from the interest savings in an offset account.
| Pros | Cons |
|---|---|
| Maximises flexibility and savings on interest. | More complicated to manage due to multiple components. |
| Gives you the security of a fixed rate and the flexibility of a variable rate. | May involve higher fees for split or offset account features. |
Key eligibility criteria for investment property loans
To qualify for an investment property loan in Australia, lenders will assess your financial situation and ability to repay the loan. Here are the key requirements you should be aware of:
- Deposit: Most lenders require a deposit of at least 10% to 20% of the property’s value. A larger deposit may help secure a better interest rate.
- Credit score: A strong credit score is essential for getting approval for an investment property loan. Lenders typically look for a score above 600 to 700.
- Income and employment stability: Lenders want to ensure that you have a stable income and can meet the loan repayments. Proof of income from employment or rental income is usually required.
- Property type: The type of property you intend to purchase will also affect the loan approval process. Investment properties in high-growth areas are generally more favourable.
- Loan-to-value ratio (LVR): Investment property loans typically have an LVR of up to 90%, although some lenders may allow higher LVRs depending on the borrower’s financial situation.
How to choose the right investment property loan?
Choosing the right loan is crucial for maximising your returns and minimising risks. Here are a few factors to consider when selecting an investment property loan:
1. Your investment strategy
Your loan choice should align with your investment strategy. If you plan to hold the property for a long time and build equity, a principal and interest loan may be ideal. However, if you are looking to maximize cash flow and reduce upfront costs, an interest-only loan may be more suitable.
2. Loan flexibility
Look for a loan that offers flexibility in terms of repayment options and loan features. Some loans allow for features like offset accounts, which can help reduce the interest payable over time.
3. Interest rate
Interest rates vary significantly between lenders. While it’s tempting to go for the lowest rate, consider other factors such as fees, repayment terms, and loan features before making a decision.
4. Loan terms and conditions
Read the fine print carefully to ensure that there are no hidden fees or penalties, particularly if you want to make extra repayments or pay off the loan early.
Tips for securing the best investment property loan
Securing the best loan for your investment property requires preparation and research. Here are some tips to help you get the most favourable terms:
- Compare multiple lenders: Don’t settle for the first loan offer you receive. Compare multiple lenders to find the best deal for your financial situation.
- Consult a mortgage broker: Mortgage brokers have access to a wide range of lenders and loan products. They can help you navigate the market and find the loan that best suits your needs.
- Improve your credit score: A higher credit score can help you qualify for better interest rates and loan terms. Ensure you pay off outstanding debts and avoid missed payments to boost your score. needs.
- Get pre-approval: Before you start property hunting, seek pre-approval for an investment loan. This will give you a clear idea of how much you can borrow and make your offers more attractive to sellers.
In addition, understanding negative gearing can help you make better financial decisions by leveraging tax benefits, maximising cash flow, and boosting your property investment returns.
Why choose ZedPlus for your investment property loan?
At ZedPlus, we know that selecting the right loan for investment properties is crucial to reaching your financial goals. Here's why we are the ideal partner for your investment journey:
- Tailored loan solutions: We offer loans designed to align with your investment objectives, whether it’s maximising cash flow, building equity, or expanding your portfolio.
- Access to 40+ lenders: With partnerships across 40+ lenders in Australia, we provide access to a wide range of loan products and competitive rates.
- Expert tax accounting support: As qualified tax accountants, we structure your loan with tax efficiency in mind, helping you maximise deductions and optimise long-term returns.
- Dedicated support: We work closely with you to understand your specific goals and guide you through every stage of the loan process, ensuring your financial plan is aligned.
- Streamlined loan process: From pre-approval to settlement, we handle the details, ensuring a seamless experience and quick turnaround times.
Connect with our loan experts today to secure an investment property loan that fits your goals.
Investment property loans FAQs
Q1. Which loan is best for an investment property?
The best loan for an investment property depends on your financial goals and strategy. Options include:
- Principal and Interest Loans: Ideal for long-term investors looking to build equity
- Interest-Only Loans: Great for investors focused on maximising cash flow in the short term.
- Split Loans: A combination of fixed and variable interest rates to balance stability and flexibility.
Q2. Is interest on investment property tax-deductible?
Yes, interest on investment property loans is generally tax-deductible in Australia, provided the loan is used to finance the property for income-producing purposes, such as rental income. Keep in mind that this may be subject to specific conditions, so it's always best to consult with an accountant.
Q3. What is the 6-year rule for investment property in Australia?
The 6-year rule refers to the ability to claim a capital gains tax (CGT) exemption on your investment property if it was once your primary residence. If you live in the property for at least part of the time and then rent it out, you may be able to avoid CGT for up to 6 years when you sell it. After this period, CGT may apply.
Q4. Do you need a 20% deposit for an investment property?
While a 20% deposit is ideal and often recommended to avoid Lenders Mortgage Insurance (LMI), it is possible to secure an investment property loan with as little as a 10% deposit. However, your lender may require LMI or have stricter approval criteria for smaller deposits.
Q4. Can I move into my investment property to avoid CGT in Australia?
Yes, you may be able to avoid capital gains tax (CGT) by moving into your investment property. If the property was once your primary residence, and you lived there for a period of time, you may be eligible for a partial CGT exemption under the 6-year rule. However, this is subject to specific conditions, so it's best to consult with a tax professional.
