- 7 Jul, 2017

Understanding Property Investment Loans

Scroll Down

So, you’ve decided to buy an investment property. But, you have no idea which loan product is the best. If this scenario sounds familiar, then it’s time to look at investment property loans.

The key to finding the right investment loan comes from knowing how you’ll pay it off. Therefore, you need to consider your cash flow, the cost of servicing the loan and how much you can ask for rent. It’s also an idea to think about your long-term investment goal.

Principal and Interest Loans

When it comes to home 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.

Hence, when you first start paying off the 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. Over time, you’ll slowly begin to chip away at your loan, making it smaller.

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 a higher cash flow.
  • Property investors seeking to own their investment.
  • People seeking to positive gear.

Interest Only Loans

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

What are the terms of interest only loans?

  • Principal repayments defer for a set period.
  • Periods are between 1 to 5-years.
  • Interest is 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 this interest-only mortgages?

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

Construction Loans

While you’re building an investment property, this loan is ideal. As you build, a construction loan funds payments as they’re needed. In most cases, home construction happens in five stages – slab, roofing, internals, lock-up and final instalment. Paying for these stages as completed means you’ll only pay interest on the amount drawn. For instance, if the slab costs $50,000, then you’ll pay interest on this sum only. 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 benefit 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, drive and landscaping.

Line of Credit

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 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.

You deserve the best investment mortgage on the market! So, find out how eChoice could help. Our brokers have access to 100’s of products, so we’ll find you a competitive mortgage.


Popular Tags: Home Buying, Home Loans, Investment Tips