Laura Akhurst - 27 Jul, 2018

Understanding Property Investment Loans

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So, you’ve decided to buy an investment property. But, you have no idea which loan product is right for you. If this scenario sounds familiar then it’s time to look at investment property loans, so you know which will suit your purposes and give you a positive return on your investment.

The key to finding the right investment loan comes from knowing your long-term goals and how you’ll pay the loan off. Long-term investment goals vary from investor to investor. Some investors buy older property and flip-it, so they make maximum capital gains. Others seek to hold the property for a cycle, usually 8 to 10-years, and to then sell to make a profitable return. Lastly, selected investors look to pay off their investments, so they positively gear them and then live off the rental income in retirement. Once you’ve ascertained your investment goal, then it’s time to look at loan options.

What is a Property Investment Loan?

A property investment loan is a home loan used to buy a property that you won’t live in, but you’ll rent to make a financial return. This type of loan is best suited to property that will gain in value over time, covering the higher entry and exit costs.

Why Should I Take Out a Property Investment Loan?

Taking out a property investment loan helps an investor to diversify their investment portfolio and to combine their debt. All interest paid on an investment property is also tax deductible, which reduces an investor’s taxable income at the end of the fiscal year.

What’s the Difference Between Investment and Owner-Occupier Loans?

All loans come with an element of risk. However, investment property loans tend to attract higher risk as the owner is not the occupier of the property. Thus, if you default on your investment loan, the lender knows that tenants may be difficult, and you’re more likely to pay your home loan if funds are short. As a result, a property investment loan attracts a higher interest rate.

Other points of difference between this loan and an owner-occupier loan are that lenders are stricter with their lending criteria and they only consider certain property types. Thus, they scrutinise the investor’s credit and employment history, as well as savings and as a rule of thumb, they will lend on homes, townhouses, units, and apartments that are greater in size than 50m2.

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What are the Different Property Investment Loans Available?

When it comes to property investment loans, there are two ways of repaying your debt – principal and interest, and interest only. A principal and interest loan means you pay a little off the amount you’ve borrowed, plus any interest incurred, while an interest-only loan means you pay the interest incurred. Payment of the property principal then occurs when the property sells. Let’s look at both loans now.

Principal and Interest Loan

When you first start paying off this type of loan, you’ll pay mostly interest. However, as the principal decreases, the amount of interest will also decrease. Consequently, your monthly repayment proportions change with you paying more off the principal.

What are the benefits of this loan?

  • Your loan decreases in value over time.
  • You reduce the amount of interest paid on the property.
  • Eventually, you’ll own the property, not the bank.

Who suits a principal and interest loan?

  • Investors with higher cash flow.
  • Property investors looking to own their investment.
  • People seeking to positively gear a property.

Interest-Only Loan

An interest only loan means you just pay the monthly interest. Thus, your principal stays the same for the loan entirety. Then, when you look to sell the property, you’ll pay back the principal.

What are the terms of interest only loans?

  • Principal repayments defer for a set period.
  • Periods are between 1 to 5-years.
  • Interest gets paid either monthly in arrears, or annually in advance.

What are the benefits of this loan?

  • Increases cash flow.
  • Lower repayments.
  • Decreases tax further.

What are the risks of interest-only mortgages?

  • Higher repayments when the interest-only period finishes.
  • More expensive over the loan’s lifetime.
  • The principal never reduces.

Those investors looking to build or to have greater financial flexibility may also be interested in a construction or line of credit loan. So, what do these loans offer?

What's my borrowing power if I earn $ per year?

Construction Loan

Ideal for the investor looking to build an investment property, this loan allows partial draw-down of funds over the duration of a build. For instance, in most cases, home construction happens in five stages – slab, roofing, internals, lock-up and final instalment. Therefore, paying for these stages as completed means you’ll only pay interest on the amount drawn. Most construction loans are also interest-only during construction, so you won’t pay any principal until the house is complete.

How does this loan help me?

  • Keeps your interest payment to a minimum while building.
  • Build-ups your cash flow.
  • Allows you to save so you can finish the home – paths, driveway, and landscaping.

Line of Credit Loan

Like a cheque account, the line of credit loan allows you to draw on funds when needed. As you use funds, you’ll then have to repay this amount, plus interest. Subsequently, you can buy an investment property or build, without waiting for finance.

What are the terms of this loan?

  • Your lender deposits the full loan amount into an account.
  • Funds are drawn down as needed.
  • Interest adds to the amount used.

Although this loan sounds perfect, you’ll need to be exceptional at money management. Plus, you’ll need to keep on top of interest. Otherwise, you may discover your finances get away from you.

Whether you are a first-time investor or an experienced homeowner, property investment can be a great way to build wealth. So, if you’re purchasing your own investment property and need a property investment loan, contact eChoice and achieve your investment goals faster by speaking with a qualified mortgage broker who can help by structuring your property portfolio for maximum benefits. Our brokers have access to 100’s of products, so we can help you find a competitive mortgage to meet your individual needs.
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