Investment Property Loans
Investment Property Financing Services
Guide Where and What to Look For!
When applying for investment property financing, you could well be looking at property finance products that are different when compared to purchasing owner occupied properties. Use our investment property financing guide to help clarify the important fundamentals that should be applied when taking out investment property financing.
When making an investment in property for income purposes, it can really help boost your cash flow if you secure a well structured loan as well as secure a low interest rate. When you compare investment loan vs home loan you’re going to find that the rates can vary markedly. Taking the time to do a detailed investment loan comparison can save you a lot and put substantial amounts of money back into your pocket.
The common types of investment property mortgages include variable rate interest only, variable rate principal and interest. Fixed rate loans are also available for terms of 1 – 5 years and they can be taken out as interest only or principal and interest repayments.
You can also have a split loan where a percentage of the total loan amount is on a fixed rate and the remaining balance at a variable rate.
Investment Property Financing -Interest
Only or Principal and Interest?
Time to clear the air about interest only or principal and interest investment property loans
There seems to be an ongoing debate in certain circles about principal and interest vs interest only loans when it comes to income property.
The common thread from one side of this debate is, if you start paying the principal off you’ll reduce the investment property interest tax deductions available.
Should you be in the process of paying off an owner occupied mortgage then you should seriously think about taking out an interest only investment loan. Owner occupied loans are non-tax deductible in Australia, however investment property loans are. Also you have to pay your owner occupied loan off with after tax dollars.
It makes financial sense to channel as many available dollars into paying your owner occupied home loan off first.
On the other hand, knowledgeable financial experts would suggest that once you have paid off or substantially reduced you’re owner occupied loan, then you might want to look at converting to principal and interest repayments on your investment property loan. Especially if you want to increase your borrowing capacity in order to buy more property.
Where Do You Find the Best Property
The first thing to decide is how much you want to borrow and the types of investment property financing that are going to be a good fit for your scenario. The lower the interest rate secured on an investment loan means the more you can save on interest.
Keep in mind those rates of interest on investment loans in the current market can vary dramatically. Rates of interest on investment property loans can also vary depending on an individual’s credit rating or credit score.
It’s important to shop around to compare and understand investment financing options and the rates offered for your own peace of mind. Most lenders out there offer investment property loans. When you go looking for investment loans you will find there are many mortgage services offering a wide range of options.
An Investment Mortgage Broker will
Quickly Show You the Ropes
An investment property mortgage broker with substantial residential investment loans knowledge can help considerably with investment mortgage solutions by bringing to light the best interest rates available on investment properties. As well as, guide you through the numerous options on how to best structure your loan to take advantage of taxes, maximise cash flow etc.
An Investment Mortgage Broker May Be More Than Just A Loan Mentor
An investment mortgage broker may also be able to offer you tips on where to find investment properties that will be a good fit for you. Of course, you would need to know what the local real estate market is like in any area of interest. A savvy investment mortgage broker will know the current conditions in many areas and will be able to tell you in advance whether you would qualify for the property financing you want.
How does Refinancing Work on an
Existing Property When Buying
an Investment property
Whenever you apply for any kind of residential mortgage – no matter if it’s for your personal place of residence or it’s for an investment property – you’ll need to show the prospective lender you’ve chosen that you have some kind of deposit.
Because, all lenders will have a loan-to-value ratio (LVR) policy – that will usually be a maximum of 80 per cent of the property’s value if you want to avoid paying Lenders Mortgage Insurance (LMI). Although, some lenders will still allow you to go up to 95 per cent of a property’s valuation (including the capitalisation of the LMI fee). That’s if you’re okay with paying a LMI fee.
Of course there may be other upfront costs you will need to account for such as, state purchase transfer stamp duty, conveyancing and possibly other minor fees.
Some property investors use their personal savings to take care of these additional purchase costs.
On the other hand, should you be fortunate enough to have sufficient established equity in your owner occupied residence or possibly any other residential property, then you may be able to take advantage of that equity and use it as a de-facto deposit instead to secure the purchase of an investment property.
Benefits of Refinancing for Investment Purposes
This is done by refinancing any existing property mortgage (if there is one) and cross collaterising (securitising) both properties. One possible benefit of refinancing is you could get a friendlier rate of interest on your current residential mortgage. In turn, this may well balance out any additional costs incurred, per chance you have to settle for a higher investment interest rate.
That said, there can be concerns for some when you cross collaterise an investment property with the family home. The concern is, in the unlikely event you weren’t able meet your repayment obligations on one or either of the security properties, the bank may look to sell you up on both properties.
The likelihood of this ever happening isn’t great, but each to their own and we mention it here so you can consider your own vulnerabilty to that type of event.
Be that as it may, many individuals’ investment property strategies include using their existing home or to refinance an existing investment property to cross collaterise with the purchase of the next property.
Other investment property strategies to consider include separating the two securities. In other words they don’t want to cross securititise an existing property to facilitate the next purchase.
If the existing property/s they own contains enough equity they will take out a loan against that property/s equal to covering the required deposit and purchase costs on the purchase of the next property.
This allows them to separate the two securities. In other words they are not cross securititising the two properties. Albeit, the liability on the family home or other property used has been increased by the size of the deposit loan taken out.
Nevertheless, if you use your personal home to fund a separate deposit to secure an investment property it will mean you’ll be able to use that as a standalone security and keep it separate from the family home.
Therefore, if the unthinkable were to happen and you ran into difficulties with keeping up with your financial commitments on that property, then your family home wouldn’t be cross securitised with the investment property.
How to Get the Best Interest Rates
for Investment Property Loans
In recent times property investment loan interest rates and their related costs have tended to be greater than family home mortgages. That could suggest your investment mortgage repayments are going to be higher than compared to an owner-occupier loan for the same amount.
It could also reduce your borrowing capacity when compared with how much you could borrow for an owner occupied loan that provides a lower rate of interest.
On another note though, recently there has been an easing of restrictions on the banks by the financial regulatory authorities when it comes to interest on investment property loans. Currently (23rd Aug 2020) it is now possible to get an investment property loan with a 2 in front of it. Contact us for more details.
Residential Investment Financing Summary
That aside, the good news is investment property financing these days can more often than not include the same features and benefits that owner-occupier loans offer. Including, such features as offset-accounts and redraw facilities. This is particularly so, if you take out a variable interest rate mortgage.
Then again, we know of lenders who offer offset accounts with a fixed rate loan (which previously was unheard of). Let us know if we can help you with those details.
There can be advantages and disadvantages tax wise with any investment property purchase, and even subtle differences in mortgage features and/or rates of interest can impact your financial outcomes over the longer term.
It’s always good advice to put yourself well ahead of the game by seeking expert professional advice prior to choosing which is the best road for you to follow.