Choosing the right investment property loan

Investment loans can be simple – like an owner-occupier mortgage, for example – or more complex, with features to help borrowers make effective use of tax and gearing. 

| | 4 minute read

Every property investor wants to maximise profit on their bricks and mortar and securing a competitive loan is one of the key steps to achieving this. 

Investor requirements are diverse and lenders tailor their products accordingly. This means investment loans can be quite simple – like an owner-occupier mortgage, for example – or more complex, with many features to help borrowers make effective use of tax and gearing. 

Choose the best rate type for your strategy

A main consideration for investors should be finding a lender that can deliver the best deal on their preferred option – whether it’s fixed, variable or a split interest rate loan.

Chief executive of real estate consultancy Your Empire, Chris Gray, refinances his multiple investment property loans every 12 months. He says a variable rate gives borrowers the ease of switching lenders to access better loan deals.

“For me, refinancing is everything, but for a borrower who is going to have only one or two investment properties, they may want the certainty and peace of mind of a fixed rate,” he says.

Loan size over low rate

Gray says prolific investors often eschew low interest rates in favour of other loan features such as borrowing capacity.   

“Some investors may be more interested in how much they can borrow rather than the interest rate so that they can have an extra buffer or be able to buy an extra property,” Gray says.

“It’s more important to those investors that the lender approves a larger loan amount so they can make an extra $50,000 a year as opposed to saving a small amount on a competitive interest rate.”

Distinct terms and conditions

Investment loans are typically more expensive than owner-occupier loans in terms of interest rates and additional upfront costs, such as the appraisal fee. The investor is also likely to be required to put forward a larger down payment, meaning their maximum loan-to-value ratio (LVR) will be lower.

Property investors with solid deposits have bargaining power in the lending market, says uno chief financial officer, Jason Azzopardi.

“Investment loan rates remain competitive for consumers with a minimum of 10% deposit plus stamp duty. Ideally, customers with a 20% deposit will unlock the most competitive deals in the market,” he says.

The upside of having a larger deposit means property investors are often sought after by lenders because of their equity position, borrowing history and profit potential.

Azzopardi urges investors to leverage this position to secure a loan with the most beneficial features for their long-term strategy.

Should I consider interest only or principal and interest repayments?

“Investors often prefer interest-only repayments to minimise the monthly payment required,” Azzopardi says.  

“From a tax perspective, choosing interest only can be an optimal loan structure for an investor. It enables them to pay only the tax-deductible component of their investment loan and redirect more income to their non-tax deductible owner-occupier home loan repayments. But investors should seek professional advice about their situation before making any decisions.”  

Further, Azzopardi says lenders limit the interest only period, so it’s important to shop around for the best IO terms and conditions.

The uno investment property home loan calculator shows the cost of financing an investment property through an interest only loan compared with one in which the principal and interest are paid off simultaneously.

Although the calculator only measures the difference in savings over a one-year and five-year period, it shows a clear advantage for those paying off the interest and the principal. Borrowers often think they are getting a better deal with an interest-only loan because they are paying less per month and their repayments are 100% tax deductible. But it’s not always the case.

Loan features to look for    

Property investors will look for loan features such as low interest rates, minimum fees and ongoing costs. One of the most popular loan features with investors is a redraw facility. A redraw facility enables investors to put any money they have saved towards making extra repayments. If they happen to need this money at any time, they can simply withdraw it.

“Investors may want to redraw the equity accumulated for use in other investments but not all lenders allow this on every product,” says Azzopardi. “So, if you do want this feature, it’s important to check if it’s included.”

What to do next:

Real estate investors can seek help from uno Home Loans in the following ways:

This information is general in nature and you should always seek professional advice when making financial decisions.

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Sonja Koremans

Sonja Koremans is a freelance business journalist who has reported on residential, commercial and industrial property markets for ten years. She has worked on news assignments across Australia and Asia, covered real estate booms and busts for major news groups and strived to deliver content that helps buyers and sellers make informed choices on their property journey. She has renovated two rundown Queenslanders and now dreams of brick and tile all the way.

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