Investor loans that stand out and offer the most competitive rate are not always easy to find. Interest rates for investors tend to be higher than they are for owner occupiers due to risk – but there are still some great deals out there if you know who to talk to.
As a general rule of thumb, rates tend to be structured something like this:
When they decide to apply for a home loan, many investors choose an interest only loan as part of a strategy for wealth creation and tax minimisation. These guys are capitalising on the property growing in value over time.
Some lenders have begun slashing rates on interest-only investment loans by up to 30 basis points following the Australian Prudential Regulation Authority’s decision to lift its lending cap on property investors, instigated in 2014. The cap required banks to limit growth in lending to housing investors to 10% of their loans, to improve lending standards.
With the cap lifted, now could be a good time to get an investor loan.
Although lenders’ rates are often publicly advertised on bus shelters and the back of cabs, you won’t necessarily get to choose that particular rate. The rate you are eligible for will vary greatly depending on circumstances such as the size of your deposit, your property’s value and where it’s located.
As an investor, the interest rate you’ll be offered has much to do with the size of the deposit you have as well as the amount of perceived risk you pose to the lender.
Foreign investors tend to pay a higher interest rate and fees, and those with bad credit or a loan to value ratio (LVR) of more than 80%. Investors with an existing property or multiple properties often harvest the equity they have in one property and use it as the deposit for their next property. This is referred to as a line of credit and is a bit like wacking the deposit on your credit card. The equity acts as security for the loan.
If you have a stable income and employment history, clean credit history and a substantial deposit – or more than 20% equity in an existing property, you should qualify for a good rate.
UNO’s technology scans thousands of rates from more than 20 lenders to find deals you may not have seen elsewhere. Our experienced home loan advisers can then tailor the right solution for you and your situation. Have a chat to uno about the best loan options available to investors.
To arrive at a standard variable rate (SVR), a lender will add extra percentage points to the official cash rate, to cover the cost of funding the loan. It also includes a margin so the lender can make a profit.
Right now, the cash rate is 1.50% and we’re seeing lenders such as Homeloans Ltd advertise a SVR at 3.64% p.a. (comparison rate 4.03% p.a.*). For investment property loans, Homeloans Ltd is offering a variable rate of 3.89% p.a. (comparison rate 4.27% p.a.*).
A variable interest rate loan is one in which the interest rate charged on your loan amount varies as market rates change. This means your payments on the outstanding balance of your loan may vary month by month, and year by year.
Choosing a fixed interest rate means you are locking into the same rate for a period of time, e.g. one year, three years, five years. This means your repayments will always be the same during that time frame – even if the RBA moves the official cash rate up or down.
If rates are low, many people will opt to lock into a fixed rate, in order to keep their repayments low in case the interest rate rises. Alternatively, if rates are high and look like they will go down at some point, many people will choose a variable rate so that their repayments drop when the interest rate falls.
Another option is to choose a split loan, which enables you to fix part of your loan – rather than the entire thing. This gives you rate stability on part of your loan, should rates go up, as well as flexibility and access to features that may only be offered on a variable rate, such as an offset account or redraw facility (see below).
It’s worth asking your lender about extra features that come with your investment home loan. These could include the option to make extra repayments, the use of a redraw facility and/or an offset account – although these features are usually only available with variable rates, rather than fixed rates, depending on the lender.
A redraw facility enables you to put any money you have saved towards making extra repayments on your home loan. You can withdraw the money at any time, but the benefit of it having been there stays in the loan, because you have been charged less interest during the time it was in your account. There may be fees involved, so it’s worth checking the details with your lender.
An offset account is like a transaction account which you set up to receive all your income. The bank then offsets the balance in your account against your loan balance and as a result, interest is only calculated on the remaining loan balance. An offset account usually has fees, but some lenders do offer no fee offset home loans.
As you may have noticed, a comparison rate is displayed next to a lender’s interest rate in comparison tables. As of 1 July 2003, all lenders by law are required to display a comparison rate next to the advertised interest rate. The comparison rate takes all of the fees – upfront fees, ongoing fees, exit fees – and adds them to the interest rate. This is meant to give you an idea of the ‘true cost’ of the loan.
The comparison rate is worked out on a standard $150,000 principal and interest loan on a 25-year loan term. If you are borrowing more than $150,000, be aware that the interest rate will have a greater impact on your situation. After all, the national average loan amount is $400,000, according to the Australian Bureau of statistics, and loan terms vary greatly among borrowers – many are shorter than 25 years, others longer.
UNO’s founder and CEO, Vincent Turner, says a good way to compare loans is to calculate the interest portion of a monthly repayment over a certain time frame such as a year or 10 years for each loan, and add costs. A UNO adviser can help too by working out the total cost comparison for your specific circumstances. If you’re borrowing a million dollars, for example, the interest charged is going to be eight times what it would be in the comparison rate scenario.
Turner also suggests borrowers undertake an annual review of their loan to see what other rates are out there. Research conducted by UNO found that 40% of Aussie mortgage holders don’t know the interest rate they’re paying on their home loan and could be paying more than they should be.
You also shouldn’t expect your lender to give you a gentle nudge if there’s a better rate on the market. “Banks don’t always love you back for blind loyalty and not looking over the fence can have a significant cost,” he says.
If you’d like to find out if you could switch to a better rate, speak to a UNO adviser about the refinancing options available and have a play with our refinancing calculator to see how much you could save.
Typically, the rate for foreign buyers will be somewhat higher than what it is for local investors because there’s more risk involved in verifying someone’s income if they work overseas. But it does depend on the lender.