Ideally, investment property loans should be interest only because an interest only investment loan is FULLY tax-deductible. It is usually the best cash flow solution when used with good capital growth. However there are other categories of loans that may be considered.
With an interest only loan your repayments are set to cover the interest component of your loan only, which allows you to keep your repayments on your investment property to a minimum. Generally, interest only loans are for a maximum five year term (depending on your lender) reverting to a principal and interest loan at the end of the agreed interest only term. However a further interest only loan can be negotiated at this time. The interest on your investment loan is tax deductible, making these types of loans attractive to investors.
These loans are set at a fixed rate for a specified period – usually one to five years. Repayments do not rise or fall with interest fluctuation throughout the specified period. At the end of the term you can lock in another fixed rate, switch to variable or go for a split loan. These loans may have limited features and lack the flexibility of variable loans. There may be early exit fees and limited ability to make extra payments.
Basic or “No Frills” Loans
These are variable rate loans with a relatively low interest rate. Repayments will rise and fall with interest fluctuations. With these loans, remember to check that the loan conditions will suit your circumstances, particularly the ability to make additional repayments and pay out the term of the loan without a penalty.
Standard Variable Rate Loans
The standard variable rate loan, like a basic or “no frills” loan, offers more flexibility than a fixed rate loan. A standard variable rate loan will often have more features than the basic variable option so the rate may be slightly higher. The extra options (for example a redraw facility, the option to split between fixed and variable, extra repayments and portability) should be taken into account when choosing your type of variable loan. Repayments will vary as interest rates fluctuate.
Line of Credit Loans
Sometimes known as equity loans, these loans are a great way to access the equity in your home to use for property investment, home renovations or other personal purchases. Repayments on a line of credit loan are determined by the interest rate applicable at that time. If you have sufficient equity in your home, you will need to make a separate application for a line of credit loan if you don’t already have one in place. With this type of loan you have the added advantage of being able to make unlimited deposits as your repayments are not set. Always check the conditions of these loans as they are sometimes more expensive than standard products.
Professional Loan Packages
These loans are offered to provide an all-in-one loan package. They offer interest rate and fee savings on your loan, credit card and transaction accounts and some lenders also waive the annual fees for your credit cards. An annual fee ranging from $120 to $395 is usually applicable on these loans.
These packages can also offer amazing flexibility, with some banks willing to waive product switching fees when changing from a variable to a fixed rate or converting a principal and interest loan to an interest only loan.
We will provide you with a comparison of various loan options from our panel of lenders to assist you with choosing the right loan for your circumstances.
Boost your buying power by tapping into the equity that’s built up in your home
If you’re an existing home owner you may be able to give your buying power a boost by tapping into the equity that’s built up in your home. What this essentially means is that you may be able to access the accumulated value that has built up in your property over the years or as the amount owed on your mortgage has fallen.
The value of this equity can then be used as a deposit for an investment property with an additional investment loan used to secure the remainder of the purchase.
What many would-be investors often don’t realise is that a lender may factor in the rental value the property will generate as part of their calculation when considering what they are prepared to lend. As long as you can comfortably cover any shortfall between the rental income and the loan amount you should be in a strong position. Moreover, unlike your home loan there are tax efficiencies linked with a loan taken to finance an investment property. For example, any gap between the annual rental income and expenses – such as interest paid on the loan plus water rates, insurance, maintenance and so on – can be offset against your taxable income.