Top investment property loan types: Compare rates, terms & flexibility
Introduction
If you are looking to invest in property, you may need to consider a different type of loan than an owner-occupier loan. The right investment property loan for investors helps you maximise returns and align with your overall strategy.
In this blog post, we will explore the different loan options available to property investors, including interest-only loans, principal and interest loans, lines of credit, and more. We will break down the features, benefits, and key considerations of each loan type to help you make an informed decision.
Key takeaways
- Investment property loans differ from owner-occupier loans and are designed to help investors grow their portfolios strategically.
- Variable-rate loans offer flexibility with changing interest rates, ideal for investors comfortable with repayment fluctuations.
- Fixed-rate loans provide stability and predictable repayments for those who prefer certainty in budgeting.
- Interest-only loans improve short-term cash flow but delay principal repayments, requiring careful long-term planning.
- Line of credit loans allow access to revolving funds for renovations or new purchases, suited to experienced investors.
- Equity release loans enable investors to use built-up property equity to fund additional investments or upgrades.
- Key loan factors such as interest rates, LVR, fees, and features directly influence long-term investment costs and returns.
Types of investment property loans in Australia (and how to choose the right one)
Let’s take a closer look at the various investment loan options available in Australia and how they can support your investment journey.
Standard variable rate investment loans
A standard variable rate investment loan allows for flexibility in both the interest rate and loan repayment terms. The interest rate on this loan type fluctuates with market conditions, making it an ideal option for investors who are comfortable with potential changes in their repayments.
Pros
- Flexibility: You can make extra repayments at any time without penalty, helping you pay off the loan faster and reduce interest costs.
- Offset account options: Many variable loans offer the ability to link an offset account, helping you reduce the amount of interest you pay.
- Potential rate reductions: If market interest rates decrease, your repayments may also decrease.
Cons
- Interest rate increases: If market interest rates rise, your repayments will increase, which could affect your budget and cash flow.
- Less predictability: Since rates fluctuate, it may be harder to predict your monthly repayments over the long term.
Suitable for
- Investors who want flexibility in making extra repayments and potentially benefit from rate reductions.
- Those comfortable with some level of unpredictability in their loan repayments.
Fixed-rate investment loans
With a fixed-rate investment loan, your interest rate is locked in for a set period, typically 1 to 5 years. This can provide certainty regarding your loan repayments during that period.
Pros
- Repayment stability: Your repayments remain the same for the entire fixed term, making it easier to budget and plan.
- Protection against rate increases: If interest rates rise, you won’t be affected until your fixed period ends.
- Potentially higher interest rates: Fixed rates are generally higher than variable rates at the time of securing the loan.
Cons
- No benefit from rate cuts: If the market interest rates drop, you will not benefit from lower repayments.
- Limited flexibility: Most fixed-rate loans limit the ability to make extra repayments or charge a fee if you exceed certain limits.
Suitable for
- Investors who prioritise repayment stability and want to protect themselves from interest rate hikes.
- Those who prefer predictability in their financial commitments for a specific period.
Not sure which type of rate suits your investment goals?
Check out our detailed comparison of fixed vs. variable interest rates to understand the pros and cons.
Interest-only investment loans
An interest-only loan allows you to pay only the interest on the loan for a set period (usually 1 to 5 years), without reducing the principal balance. This is often used by property investors who want to minimise monthly repayments in the short term.
Pros
- Lower Initial repayments: Since you are only paying interest, your monthly repayments will be lower, improving your cash flow.
- Maximised cash flow: This is ideal for property investors looking to maximise the amount of money they have for reinvestment or other opportunities.
- Tax benefits: Interest on investment loans is generally tax-deductible, making this an attractive option for investors.
Cons
- No equity building: Your loan balance remains the same during the interest-only period, meaning you are not building equity in the property.
- Higher repayments after the interest-only period: Once the interest-only period ends, your repayments will increase as you will need to start paying down the principal as well.
- Long-term interest costs: Since the loan balance doesn’t reduce, you could end up paying more in interest over the life of the loan.
Suitable for
- Investors who are focused on maximising short-term cash flow and plan to sell or refinance the property before the principal and interest repayments begin.
- Those who are using the property as a source of capital for future investments.
Line of credit investment loans
A line of credit (LOC) loan gives you access to a revolving credit facility, similar to a credit card. You can borrow, repay, and borrow again up to a pre-approved limit. This type of loan offers a high degree of flexibility for property investors.
Pros
- Flexible access to funds: You can draw on the credit at any time for investment purposes, such as purchasing additional properties or funding renovations.
- Interest only on used credit: You only pay interest on the amount of the loan you actually use, allowing you to control your costs.
- Revolving credit: As you repay the loan, your available credit is restored, offering continuous access to funds.
Cons
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Higher interest rates: Line of credit loans often have higher interest rates compared to standard variable loans.
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Risk of overborrowing: Without strict financial discipline, it's easy to borrow more than you need, which could lead to higher debt.
- Complexity in management: Managing and tracking a line of credit can be more complicated than a traditional loan, especially for investors with multiple properties.
Suitable for
- Investors who are planning to purchase multiple properties or need ongoing access to funds for investments and property management.
- Those who need flexibility in managing their finances and are disciplined enough to avoid overspending.
Wondering which is better for your next expense — a personal loan or a credit card?
Get the facts and choose the best fit.
Equity release or cash-out refinance loans for property investors
An equity release loan, also known as a cash-out refinance, allows you to tap into the equity you have built up in your existing investment property. Essentially, you refinance your current loan for a higher amount than what you owe, and the difference is provided to you as cash. This loan option is often used by investors to fund further property purchases or renovations.
Pros
- Access to additional funds: You can access the equity in your property to invest in more properties or renovate your existing investment to increase its value.
- Tax benefits: Interest on loans used to acquire or improve investment properties is generally tax-deductible, potentially providing you with tax savings.
- Flexibility: The released funds can be used for a variety of purposes, such as purchasing new properties, refinancing existing debts, or funding renovations.
Cons
- Higher loan balance: By increasing the size of your loan, you are effectively increasing your debt, which may lead to higher monthly repayments.
- Risk of overborrowing: If you take out more equity than you can afford to repay, it could lead to financial strain and reduced property equity.
- Potentially higher interest rates: Equity release loans may come with higher interest rates compared to regular home loans due to the larger loan amount and associated risk.
Suitable for
- Investors who already own an investment property and want to access the equity to purchase additional properties or fund property renovations.
- Those looking to leverage their existing property portfolio to grow their investment strategy.
- Investors who are comfortable with managing higher debt levels and can afford the potential increase in repayments.
After reviewing the different investment property loan types, it’s helpful to see what lenders are currently offering. Take a look at the live investment home loan rates featuring fixed, variable and interest-only options from leading banks and non-bank lenders across Australia. This gives you a quick snapshot of the current market landscape.
Key factors when comparing investment property loans in Australia
After reviewing the different loan types, there are several key factors you should take into account when selecting the best loan for your investment property. These factors can affect your overall loan costs, repayments, and flexibility.
Interest rate
The interest rate is one of the most important factors influencing the overall cost of your loan. A lower interest rate generally means lower monthly repayments and less interest paid over the life of the loan. It is also important to consider the comparison rate, which includes the interest rate plus any applicable fees. This gives a clearer idea of the total cost of the loan.
Loan-to-value ratio (LVR)
The Loan-to-Value Ratio (LVR) determines how much you are borrowing against the value of the property. A lower LVR (usually 80% or less) often results in better interest rates. Many lenders, like Westpac, offer rate discounts for LVRs up to 70% (for example, a 0.10% p.a. discount for an LVR of 70% or less).
Repayment flexibility
Consider whether you want the ability to make extra repayments, use a redraw facility, or whether you are interested in interest-only repayments. Some loans allow for extra repayments without penalty, which can help you pay off your loan faster and reduce the interest you pay over time.
- Westpac offers flexibility with its Flexi First Option, allowing you to make extra repayments and pay down the loan faster.
- CBA's Digi Home Loan allows unlimited additional repayments and redraws, providing greater flexibility in managing your loan.
Loan features (Offset, redraw, and extra repayments)
Many loans come with additional features, such as offset accounts, redraw facilities, or the ability to make extra repayments. These features can help you save on interest payments over time by reducing the loan balance on which interest is charged.
Offset or redraw – which saves more?
Compare both features to see which one offers greater interest savings and flexibility.
Fees and charges
While interest rates are important, the fees associated with a loan can also add up and impact the overall cost. Look at fees such as application fees, monthly service fees, annual fees, and early repayment penalties. These can significantly affect the total cost of your loan.
Loan term
The term of the loan (typically 25 or 30 years) affects your monthly repayments. A longer term means lower monthly payments, but you will pay more interest over time. On the other hand, a shorter loan term may result in higher monthly repayments but will save you money on interest in the long run.
Tip: While a longer loan term may seem attractive due to lower monthly repayments, a shorter term might help you save on interest costs. Ensure the loan term aligns with your cash flow and investment strategy.
Fixed vs. variable rate
Decide whether a fixed or variable interest rate best suits your investment strategy. A fixed rate provides repayment certainty for a set period, while a variable rate offers more flexibility if interest rates drop but comes with the risk of rate increases.
Want expert help finding the right investment property loan?
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Common investment property loan mistakes (and how to avoid them)
When selecting an investment property loan, it's easy to make mistakes that can affect your financial future. Being aware of these common pitfalls and knowing how to avoid them will help you choose the right loan for your needs.
Mistaking a low rate for the best loan
Many investors are attracted to loans with the lowest interest rates, assuming they offer the best deal. While a low rate can reduce monthly repayments, it doesn’t always mean the loan is the most suitable for your investment strategy.
A low rate might come with fewer features or added restrictions, such as limited flexibility for extra repayments or no access to an offset account. Additionally, some loans with low rates might have higher fees that offset the benefits.
Always consider the loan features, such as offset accounts, redraw facilities, and the ability to make extra repayments, alongside the interest rate. Comparing the comparison rate, which includes both interest rates and fees, will give you a better idea of the total cost of the loan.
Ignoring tax strategies
Investors sometimes neglect to optimise their loan structure for tax benefits. The interest paid on investment loans is generally tax-deductible, and interest-only loans can maximise deductions in the short term.
However, not understanding how tax laws like capital gains tax (CGT) apply when selling a property can lead to missed tax savings. Consult with an experienced tax accountant to ensure your loan structure aligns with your tax strategy. This will help you make the most of available deductions and avoid unnecessary tax liabilities.
Learn how to calculate CGT on property sales in Australia so you are not caught off guard when it's time to sell.
Overleveraging
Some investors borrow more than they can realistically afford to repay, hoping to maximise their investment. This can be risky, particularly if property values fluctuate or rental income becomes inconsistent. Overleveraging can put you in financial strain, especially during a downturn or periods of low rental yield.
Before borrowing, carefully assess your ability to service the loan under various scenarios. Consider potential interest rate hikes, fluctuations in rental income, or market downturns. Ensure you can comfortably manage repayments even if your circumstances change and have a financial buffer in place for unexpected costs.
Why do property investors choose ZedPlus for investment loans?
At ZedPlus, we know that finding the right investment property loan can make all the difference in growing your property portfolio. Here’s why we are the top choice for property investors:
- Competitive interest rates: We offer some of the most competitive interest rates on investment property loans. Whether you’re purchasing your first investment or expanding your portfolio, we ensure you get the best possible rate to maximise your returns.
- Access to 40+ lenders: With access to over 40 leading lenders, we give you the freedom to choose the loan that best suits your financial goals, with options you won't find with a single lender. This means better rates, more flexibility, and the right fit for your investment strategy.
- Expert tax advice & loan structuring: We are not just mortgage brokers. Our in-house tax accountants work with you to optimise your loan structure for maximum tax benefits and ensure you’re getting the best deductions. Whether it's structuring your loan for capital growth or maximising interest deductions, we've got you covered.
- Fast & easy loan approvals: We know time is money. That’s why we offer fast, streamlined approvals so you don’t miss out on investment opportunities. With our efficient process, you can get your loan approved and start growing your portfolio without unnecessary delays.
Ready to take your property investment to the next level? Contact us now for a free, no-obligation consultation. Let us show you how we can secure the perfect investment loan for you today.
Investment property loan FAQs for Australian investors
1. Can I claim the interest on an investment loan used for both private and rental purposes?
Yes, you can claim the interest on an investment loan, but only the portion that relates to producing rental income. If you use part of the loan for private purposes, you must apportion the interest expense. For example, if you refinance your investment loan and use part of the loan to purchase a private home, you can only claim the interest that pertains to the rental property portion.
2. What expenses are deductible when holding an investment property?
You can deduct various expenses related to your rental property, including:
- Interest on loans used to acquire or maintain the property.
- Repairs and maintenance costs (as long as they are not capital improvements).
- Council rates, insurance, and property management fees.
- Body corporate fees for ongoing administration and maintenance.
However, expenses related to holding vacant land or for private use of the property are generally not deductible.
3. Can I refinance my investment property loan?
Yes, you can refinance your investment property loan to secure a better interest rate, access equity, or change loan terms. Refinancing can help reduce your interest payments or increase your borrowing capacity for future investments. However, be mindful of any refinancing fees or penalties.
4. Are interest-only loans suitable for first-time property investors?
Interest-only loans can be beneficial for first-time property investors who want to maximise cash flow in the short term. However, these loans may result in higher repayments later, as the principal is not being paid down during the interest-only period. It’s essential to ensure you have a clear plan for when the interest-only period ends.
