Choose The Best Loan For Your Investment Property
Having the right finance in place is the foundation of a good property investment. However, with hundreds of options out there, it can be overwhelming choosing the right loan.
Narrowing down the right type of finance product comes down to your investment strategy – your risk profile, short-term goals and long-term vision. So as you research the options, make sure you have these clear in your mind.
Get started with our guide to the most popular types of loans:
With an interest only mortgage, you pay interest on the loan and nothing more. It helps you optimise the tax effectiveness of your investment. Unlike a capital and interest mortgage, capital repayments don’t reduce the negative gearing benefit. Remember, it pays to choose a loan that gives you the option to repay lump sums – just in case your investment strategy changes.
Variable rate home loans are very flexible and allow you to redraw, pay down, offset and even switch to other options if circumstances arise. On the downside, you can’t rely on interest rate stability and should allow for fluctuations in the interest rate during the lifetime of your loan.
With a fixed rate loan, you’ll know your monthly repayment outgoings over an agreed fixed period. So this is a good option if you have a low-risk appetite and expect to hold your investment property for a given period. It’s worth noting that mortgage exit fees and break charges can be high, should you need to realise your property investment.
Offset accounts link to your mortgage, helping you reduce the level of interest you pay. Your linked account balance is offset daily against your loan balance. For example, if you have a home loan of $200,000, and you have $20,000 in your linked account, you will only pay interest on $180,000 of your home loan.
With an offset arrangement, you can keep your savings separate without affecting the tax status of your loan and improve your cash flow position. However, and offset arrangement isn’t available on all types of mortgages.
No deposit or low deposit
Loans that provide 95% or even 100% of the property valuation are becoming increasingly rare. But if you can secure such a loan you will be optimising the negative gearing aspect of your investment. On the downside, you will have to pay Lenders Mortgage Insurance for any loan that exceeds 80% of the property valuation.
A low documentation loan is suitable for self-employed investors who may not have all the supporting documentation to confirm their income (such as regular Payslips). As a result, lenders tend to charge a higher interest rate on low doc loans.
Combination or split loans
Splitting the loan amount between a fixed rate and variable rate is a clever way to get flexibility and regularity of payments. You can lock in a fixed rate on a part of your loan and still make reductions on the other part as needed. But beware the break costs associated with the fixed element of the loan.
Line of credit
Arranging a line of credit against the equity in your existing home can be an effective way to borrow for your next property. The biggest advantage is that you will only pay interest on the amount you draw down. However, you are putting up your home as security against your investment property purchases, which can be risky.
Non-conforming loans are suitable for people unable to get credit from a traditional lender. Interest rates and fees will be higher because the lenders consider you to be greater risk.
With such a wide range of options, it pays to get expert advice before you commit to your finance strategy, contact us on 1300 539 252 to speak to one of our expert consultants.