Finding a competitive home loan with the right features is just as important for your investment property as your own home.
There are a number of home loan features that can be helpful for property investors and these are usually related to your investment goals. Here's a quick guide to six loan features and their benefits for property investors.
1. Interest only repayments
An interest only home loan is when borrowers only have to pay the interest as well as any fees for a fixed period of time, usually five to 10 years. The full principal amount they borrowed remains the same for the loan term so at the end they will owe exactly what they borrowed in the first place.
Investors often choose interest only because:
- It allows them to make minimum repayments on debt that they will receive a tax deduction on to maximise the deduction, and focus on paying off personal debt like their home loan which is not tax deductible
- Repayments will be significantly lower than principal and interest repayments and can make having an investment property easier to manage
Those that don't choose interest only do so because they:
- Don't have personal debt and have the cashflow to pay the principal
- Don't want to rely on a capital gain when they sell the property to make a profit and use the discipline of principal and interest repayments to make inroads into what they owe
Most lenders limit the number of years a loan can be interest only and it will vary between lenders so it's a good idea to shop around and compare.
2. Offset account
An offset account is a separate account that is linked to your home loan. The balance of this account is added to your loan amount when the interest is calculated so the interest charged is less. It is a feature commonly used for the loan on your own home but can be useful for property investors too.
For tax reasons it is best not to have funds flowing in and out of the investment property loan unless it is related to the property. If you don't have personal debt to pay down or offset, it can allow you to use your savings to reduce the interest on your investment property without paying the funds into the loan.
3. Ability to fix the rate
Fixing the interest rate on your home loan can provide repayment security and help you budget more effectively. The repayment amount is set at the start of the fixed period and will not change until the end of the fixed term. As your rental income is usually a set amount, it can help with budgeting for your investment property.
The restrictions of fixed rate loans, often don't impact investors as much. Being able to pay extra and redraw or have an offset account linked are not things that most investors often need. They may also plan to have their investment property for the long term and won't need to sell for reasons like relocating to another state for work.
Keep in mind is if you sell the property or refinance while the loan is fixed you could incur fixed break costs, so think carefully about the likelihood of wanting to do this before you lock in a fixed rate.
4. Revalue the property to use the equity
Some investors like to periodically get a new valuation done on the property and increase the loan to access the equity that has built up. These funds can then be used to purchase another property. Some loans and lenders don’t allow this so it is definitely worth asking the question if this something you would be looking to do.
5. Set repayments timing and frequency
Having the ability to set when and how often your repayments are made can be a big advantage when it comes to managing the cashflow of your investment property. If the repayments can be timed to occur just after you are paid the rent by the property manager and/or when you receive your salary, it could help in juggling your payments.
6. Interest rates for investment property loans
In order to slow down investor lending, the Australian Prudential Regulation Authority (APRA) implemented stricter guidelines in order to keep investor lending increases below 10%. This is in an attempt to cool down the property market and stabilise property prices. There have been a number of changes as a result of this which you will encounter if you refinance or apply for a loan to purchase another property. The main change that has probably already impacted you though is an increase in interest rates on investment loans. Owner occupied interest rates also increased but not nearly as much.
There are still really competitive interest rates for investment property loans but to find them you will need to shop around. Interest rates for investment properties may not be advertised either so you may need to contact the lender to find out which loan product and interest rates apply.
State Custodians offers some really competitive interest rates for investors. They also come with all the features mentioned above. To see our current interest rates, click here and select the INVESTMENT tab.
Whether you are an investor shopping for a new home loan or comparing your current home loan with what is on the market, State Custodians can help you. Our Lending Specialist team can discuss our array of home loan features with you one on one. Give our team a call on 13 72 62 or they can contact you if you leave your details here.
Find out more about other home loan options and get tips on what to look for: