Compare investment property home loan rates

Property investing is one of Australia’s most popular strategies for building long-term wealth.

The latest data suggests around one in five taxpayers – more than two million Aussies – own an investment property.

One of the reasons investing in property may be preferred over investing in other asset classes – such as shares or cryptocurrency – is the ability for an investor to leverage to enter the market.

Most investors can borrow between 80% and 95% of a property’s value from a lender. This means a person investing in the property market can typically hold a more substantial portfolio while putting forward less capital upfront compared to another investor entering a different market.

It also means investors can feasibly benefit from higher returns and leverage equity built in their properties to further expand their portfolio.

In essence, a competitive investment home loan can act as a secure ticket to a thriving property portfolio. Though, no investment is ever guaranteed to provide returns.

What is an investment mortgage?

Whether you’re purchasing your first investment property or your fifth, you’re probably going to need an investment home loan to get you there.

Investment home loans are a type of loan that allows investors to purchase a property with the sole purpose of making money off it, through rental income, capital growth, or both.

Here are the major differences between an investment home loan and an owner-occupier home loan:

• Higher interest rates
  Investment home loans typically have slightly higher interest rates than owner-occupier home loans, largely because lenders consider them a higher risk

• Lower maximum LVRs
  Investment home loans generally have a lower maximum loan-to-value ratio (LVR), often capped at 90% with Lenders Mortgage Insurance (LMI), whereas owner-occupier home loans generally have a maximum LVR of 95%

• Stricter terms and conditions
  Investment loans may come with stricter lending criteria and additional conditions compared to owner-occupier loans due to the perceived higher risk

• More repayment options
  Investment home loans may offer the option to make interest only repayments for a period, which is less common for owner-occupier loans

• Additional tax benefits
  Investors can typically deduct the interest portion of home loan repayments and other expenses related to the investment property from their taxable income

4 tips to help you compare investment property home loans

Investment properties can be great financial assets, especially when an investment is throughly planned and considered.

Strategising can start with choosing the best investment home loan to buy a property. After all, the mortgage product you end up with will have a major impact on the cash flow and overall viability of your investment.

When hunting for the best deal, it is a must to look beyond a home loan’s advertised interest rate. A home loan offer may have a lower interest rate, but it might not provide enough flexibility for you to play your cards your own way.

Here are four tips to help you compare investment home loans:

1. Take note of the interest rate

Investment home loan interest rates are generally higher than owner occupier rates, but that doesn’t mean there aren’t competitive deals to be found.

A lower interest rate means lower repayments. If you’ve got an interest only loan, that interest is tax-deductible, which could make your loan even cheaper overall!

If you’re unsure of the impact a slightly higher or lower rate could have on your finances, Your Mortgage’s Mortgage Repayment Calculator could prove a useful tool.

2. Pay attention to any fees and charges

Mortgage fees on investment home loans are generally tax deductible, but it's still important to look for an investment loan with low or no fees where possible.

This is why it’s worth considering a home loan’s comparison rate as well as the interest rate. The comparison rate factors in fees, extra charges, the impact of interest-only periods, and other considerations.

3. Consider the loan features on offer

Some investment home loans are feature-rich and offer plenty of potential benefits, while others are comparatively basic. Typically, feature-rich home loans come at a higher cost than their basic counterparts, whether through a higher interest rate or greater fees.

Savvy property investors should consider which features they would make use of and which would be wasted on them.

Features commonly offered on investment home loans include:

• Redraw facility
• Offset account
• Ability to make extra repayments
• Ability to make interest only repayments
• Option to split home loan interest rate

4. Determine the best rate and repayment options for your needs

You need to consider whether you want a fixed or variable loan, as well as the repayment type – principal and interest or interest only?

Which option will best suit you will depend on your investment strategy, risk tolerance, and your expectations of the broader economy.

Fixed vs. variable interest rate

The repayments on a fixed rate home loan won’t change over the fixed rate period, which typically spans between one and five years. On the other hand, the repayments on a variable interest rate home loan can fluctuate. However, variable rate home loans generally allow unlimited repayments and other features not commonly offered on fixed rate mortgages.

Repayment type

In addition to choosing between a fixed or variable rate, an investor will need to decide whether they want to make principal and interest or interest only repayments.

A person making principal and interest repayments will reduce the amount they owe to their lender with each repayment. Some investors choose to make interest-only repayments, however, because the interest paid is tax deductible. They might also expect to sell their property for a capital gain later on and therefore place less value on reducing their debt.

How to get an investment home loan

Applying for an investor home loan is very similar to applying for any other kind of home loan.

The lender will want to get a full picture of your financial situation. You’ll need to ensure you provide it with the means to go over your credit history, bank statements, income, expenses, assets and debts, and any other relevant factors with a fine tooth comb.

Here are some important things to note when applying for an investment home loan:

• You’ll probably need a deposit of at least 10%
  Low-deposit investor home loans are rare and you’ll often need to stump up a deposit of 10% or more of a property’s value and, if you don’t have a deposit of at least 20%, you’ll likely have to pay for LMI.
  The deposit can be made up of savings or the equity you own in another property.

• Higher interest rates
  Investor home loans usually have higher interest rates than owner occupier loans.
  This is because investment loans are generally thought to be a riskier prospect for a lender to enter into.

Because lending rules are generally stricter for investment home loans, investors will need to prove they earn enough to cover the cost of repayments.

Income from certain sources, such as rent from other investment properties, is typically included in income assessments. However, some lenders might only consider a portion of such income, as it is often deemed less reliable than a wage or salary.

In good news, a lender will generally consider the rental income you hope to receive after purchasing your investment property in serviceability tests, although it might not factor in the full amount you expect to receive.