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Key takeaways:
- The average interest rate on new investment home loans is 6.44% p.a., according to the latest data from the Reserve Bank of Australia (based on loans with principal and interest repayments)
- New investment loans saw an average of $588,454 as of May 2024, while the investor sector grew by 13% annually with a 32% increase since May last year.
- Western Australia is currently the strongest investor market based on the average loan size as of May 2024, increasing 15.8% year-on-year.
What is an investment home loan?
An investment home loan is a type of mortgage designed for purchasing a property with the intention of generating rental income and/or increasing its value over time. Unlike an owner-occupier home loan that’s used when the borrower will be living in the property, an investment loan is used to buy a property that you rent out to tenants.
Investment loans tend to have slightly higher interest rates than owner-occupier loans, and may have stricter lending criteria to meet.
How do investment property loans work?
Investment loans function like standard mortgages: you borrow a lump sum to buy a property and repay it with interest over a specified loan term, using the property itself as security until the loan is paid off.
Lenders assess your borrowing capacity differently if you’re applying for an investment property loan. They consider not only your income, savings, expenses and loan-to-value ratio (LVR), but also the property’s potential rental income and associated costs such as maintenance and insurance fees. This rental income is crucial as it directly impacts your ability to service the loan.
How to get a low interest rate on your investment home loan
Finding a low interest rate on an investment loan plays a big part in the overall profitability of your investment. One of the easiest ways to secure a better rate is to have a lower loan-to-value ratio (LVR), ideally at 60% LVR or below, as lenders view these loans as less risky.
Comparing multiple lenders and loan products is also a good starting point as each lender offers different rates and terms and conditions based on varying investment strategies and financial situations. This is where a mortgage broker can assist.
Many property investors work with mortgage brokers because they have access to a wide range of lenders (typically 20 or more). This means they can show you a selection of suitable investment home loans with not only competitive interest rates, but also loan features, low fees and repayment structures.
3 key reasons why investors use mortgage brokers
There are several pros and cons to using a mortgage broker, but here are some key reasons why investors choose to work with them:
1
Firstly, brokers often have access to a wide range of lenders and loan products, which can lead to better terms and rates tailored to investment goals.
2
Secondly, brokers specialise in navigating the ins and outs of finance for investors, providing invaluable advice throughout the loan application process.
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Lastly, their knowledge of local markets and regulations can help investors make informed decisions, maximising returns and minimising risks. This includes working with tax accountants, buyer’s agents and financial advisers to align investment strategies.
Types of investment property loans compared
Investors usually have two options when it comes to paying off a loan. Here are some key differences between the two investment loan types:
Principal & interest (P&I) investment loan
- Principal & interest loans make up 60% of investor loans, according to APRA. It covers the principal loan amount as well as the interest charged.
- Higher repayments but you’re paying off both components of your investment loan, potentially increasing equity over time.
- Paying off your principal with each repayment could help you save on interest over the loan term.
Interest-only (IO) investment loan
- Interest-only loans account for 40% of investor loans. It allows you to postpone repayments of the borrowed amount (known as the ‘principal’) for a specified period, typically three to five years.
- During this period, you are only required to pay the interest on the loan. Once the interest-only period ends, the repayments switch to covering both the principal and interest. This can increase your repayments significantly.
- Usually comes with lower repayments as you’re only paying the interest on the loan. This can free up cash for other investments or expenses.
Fixed or variable interest rates on investment loans?
Like other types of home loans, investor loans offer the choice between variable or fixed interest rates, or a combination of both. Here’s a quick overview of your options:
- Variable interest rate: The interest rate on your investment home loan fluctuates with market changes. This allows for lower repayments when rates drop, but they’ll be higher if rates rise. Investors find this type of loan flexible, usually allowing unlimited extra repayments and features such as offset accounts to reduce interest costs.
- Fixed interest rate: With a fixed-rate mortgage, your interest rate remains fixed for a set period, typically one to five years. This stability means your repayments are shielded from rate increases, but you won’t benefit from reduced payments if rates drop. After the fixed term ends, your rate switches to a standard variable rate. Investors choose fixed-rate loans to ensure rental income covers repayments for the entire fixed period, though these loans generally won’t offer as many features and could charge fees for making extra repayments.
- Split: A split loan combines both variable and fixed rates, offering a strategy to hedge against interest rate fluctuations. By fixing a portion of your loan, you gain stability in repayments, while the variable portion provides flexibility. Split loans can be divided into various ratios like 50/50, 60/40, or 70/30, depending on your preference for stability versus flexibility.
Loan features for investors to consider
Investors find features such as redraw facilities and offset accounts beneficial for not only reducing interest costs, but also for accessing surplus funds when it’s needed. Here’s how they work:
Redraw facility
Allows you to withdraw any additional repayments that have been made on your investment loan, giving you access to funds if needed.
Offset account
A transaction account linked to your home loan, where the balance offsets against the principal loan amount, reducing the interest payable on the mortgage.
Offset accounts are particularly appealing to investors as they come with potential tax advantages. By reducing the loan balance with the funds in the offset account, you can lower the interest you pay on the loan. These reduced interest costs can potentially decrease your taxable income, resulting in a lower tax bill.
Note: Always talk to your accountant or financial advisor to fully understand the tax implications specific to your situation.
Investment property loan vs owner-occupier home loan
You may be wondering how an investment property loan differs from a standard owner-occupier home loan. Here are some key distinctions:
Average interest rate* | |
New investment property loan | 6.44% p.a. |
New owner-occupier home loan | 6.21% p.a. |
Average loan amount | |
New investment property loan | $588,454 |
New owner-occupier home loan | $626,055 |
Maximum loan-to-value-ratio (LVR) | |
New investment property loan | Usually 90% |
New owner-occupier home loan | Usually 95% |
Deposit | |
New investment property loan | Minimum of 10% (LMI may apply) |
New owner-occupier home loan | Minimum of 5% (LMI may apply) |
Tax implications` | |
New investment property loan | May allow investors to deduct interest and expenses from rental income, potentially reducing taxable income (known as negative gearing) |
New owner-occupier home loan | Normally does not offer any tax benefits, but if it’s a primary residence there are no tax implications on the property’s capital gains when it is sold |
| New investment property loan | New owner-occupier home loan | |
|---|---|---|
Average interest rate* | 6.44% p.a. | 6.21% p.a. |
Average loan amount | $588,454 | $626,055 |
Maximum loan-to-value-ratio (LVR) | Usually 90% | Usually 95% |
Deposit | Minimum of 10% (LMI may apply) | Minimum of 5% (LMI may apply) |
Tax implications` | May allow investors to deduct interest and expenses from rental income, potentially reducing taxable income (known as negative gearing) | Normally does not offer any tax benefits, but if it’s a primary residence there are no tax implications on the property’s capital gains when it is sold |
How to compare investment home loans
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Choose a good mortgage broker
Work with a mortgage broker who understands your investment strategy and financial situation. They can recommend the best loan structure for you, such as an interest-only loan for tax benefits or a variable rate loan with an offset account to pay off debt faster.
2
Compare a range of investment home loans
With the help of your broker, compare the latest deals and interest rates offered by different lenders. This gives you a baseline to see if the rates, fees and terms are competitive.
3
Keep an eye on comparison rates, not just interest rates
While the interest rate will indicate what you’ll pay in interest, the comparison rate will highlight what fees you’ll also be paying. Both are important in assessing the total cost of your loan.
4
Consider loan features
Look for an investment property loan that includes an offset account and/or redraw facility (if suitable). These features help reduce interest costs and provide access to extra cash when needed.
Tip: Mortgage brokers typically have relationships with numerous banks, credit unions and specialist lenders, including those that may not be as well-known or accessible to individual borrowers. This access can often lead to better loan options, competitive interest rates, and more favourable terms. Additionally, brokers can leverage their expertise to negotiate on behalf of investors, potentially securing you a better deal while saving you time and effort throughout the loan application process.
Investment property loan eligibility and how to apply
Applying for an investment property loan generally involves filling out an application form with the lender and submitting supporting documents to confirm your eligibility, including:
- Proof of income (e.g. salary or rental income from other investment properties)
- Proof of expenses (e.g. bank statements)
- Proof of assets (e.g. other properties owned)
- Proof of liabilities (e.g. loan statements)
- Proof of identity
Keep in mind that if you’re going to use a mortgage broker, they will explain in detail what documentation is needed by your chosen lender. Your broker will then submit an investment home loan application on your behalf, providing you with updates along the way (i.e. if further information is required by the lender).
If you’re applying on your own, you can usually submit an application online through the lender’s website or in-person at a branch.
Regardless of whether you use a mortgage broker or not, once your application is submitted, the lender will evaluate your borrowing capacity based on the documents and information you’ve provided. This includes details about the investment property you’re looking to purchase.
If you meet the lender’s initial criteria, you’ll then need to supply your income details like payslips and tax returns. From here, the lender will assess your finances and expenses, granting pre-approval for a specified loan amount.
After making a formal offer on an investment property, the lender will arrange a valuation. Upon receiving unconditional approval, your loan funds will be released, securing the investment property.