Investment home loans are a type of mortgage designed for the purchase of investment property. Their structure is largely similar to other types of home loans, with the investor borrowing a set amount over an agreed period and the lender registering an interest in the property until the loan is fully repaid. However, these loans are tailored to meet the unique needs of property investors and typically have stricter lending criteria due to their higher level of risk.
Key features of investment home loans include:
- Repayment options: choose between principal-and-interest repayments, which reduce the loan balance, or interest-only payments, which mean lower repayments but no reduction in the principal.
- Interest rates: both fixed and variable interest rates are available, though rates are typically higher than owner-occupier loans due to the added risk for lenders.
- Taxes and fees: you will face a range of fees and taxes when investing in a property, such as stamp duty, land tax, application fees, monthly account-keeping fees, and more.
- Deposit requirements: investment loans generally require a larger upfront deposit, with lower loan-to-value ratios (LVR) compared to owner-occupied loans.
- Flexible repayment schedules: lenders may offer options for weekly, fortnightly or monthly repayments to align with your cash flow.
- Additional features: many loans include offset accounts and redraw facilities to help manage finances effectively.
How much deposit do I need for an investment home loan?
Most lenders require a deposit of at least 20% of the property’s value for an investment home loan. Meeting this threshold not only improves your borrowing chances but also avoids lenders mortgage insurance (LMI), a significant cost added for loans with smaller deposits.
If you own an existing property, you can use the equity you've built up as a deposit instead of cash savings. Usable equity is calculated as 80% of your property’s value minus the remaining loan balance. For instance:
- Property value: $800,000
- 80% of value: $640,000
- Mortgage balance: $450,000
- Usable equity: $190,000
This $190,000 could act as your deposit, allowing you to secure an investment property without needing cash upfront. However, it’s crucial to ensure you can manage repayments comfortably.
What other costs are involved in buying an investment property?
As well as the purchase price of your investment property, you should also consider the following costs you may face when purchasing and renting out an investment property:
- Stamp duty
- Loan establishment fees
- Building inspection
- Home and contents and landlord insurance
- Property letting fees
- Ongoing property management fees
These costs can add up, but you may be able to take advantage of certain tax benefits to help offset the costs of ownership and improve your financial position. These could include:
- Loan interest: the interest on your investment loan is often tax-deductible.
- Depreciation: claim deductions on the property’s structure and depreciable assets like appliances.
- Maintenance: expenses for repairs are deductible, though upgrades are depreciated over time.
- Insurance and management costs: Premiums and property management fees are tax-deductible.
On top of this, if your property expenses exceed your rental income, the loss can reduce your taxable income. This is known as negative gearing. For instance, if you incur $30,000 in costs but earn $20,000 in rent, the $10,000 deficit can offset other taxable income.
What are the benefits of opting for an interest-only investment loan?
The benefits of interest-only investment loans boil down to tax advantages. If the cost of owning your investment property is more than the income it produces, your property is said to be negatively geared. You can claim all costs associated with your investment as a tax deduction, including the interest charged on your investment property loan. Therefore, if you pay interest-only on your investment loan, you can claim 100% of the loan costs as a tax deduction and therefore pay less income tax on any income you earn from your regular employment.
Your investment strategy may involve taking out an interest-only loan for a set number of years with a fixed interest rate. During this time, you can offset all your loan payments as a tax deduction, and use any rental income for other investment purposes. Once your fixed interest term expires, you could sell your investment property and benefit from the capital growth on your property – using the profit to pay off your original investment loan, and hopefully having sufficient profit left over to finance your next investment.
However, it’s important to note that interest-only loans are most suited to investors wishing to minimise their mortgage repayments with an eye to selling their investment property within a few years. If you have no intention of selling your investment property, an interest-only loan will prove to be more expensive in the long run and less beneficial.
Types of home loans
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Top tips to keep in mind before buying your investment property
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Think about your rental strategy
Before buying your rental property, think about your strategy. Are you buying it with the intent of getting a steady additional income from the rent, or is your intent to negatively gear it to relieve the burden of a large income tax bill? Remember the three Rs in real estate: make sure you buy the right property in the right location for the right reasons.
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Do you have time to manage your rental property yourself?
Is your rental property located conveniently nearby to allow you to keep an eye on it and respond quickly if your tenants need an urgent repair job? If you don’t have the time and availability, you should budget to employ a property manager right from the start, rather than waiting until a crisis happens.
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Plan what you’ll do if your rental property suffers expensive damage
Landlord insurance can cover the problems that may arise with your rental property. Ensure your landlord insurance covers all eventualities, such as floods, bushfires and other natural disasters, as well as the potential loss of rental income while major repairs are undertaken.
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Don’t squeeze your finances too tight
Plan for variations in income and extra costs from your rental property to avoid falling into financial distress. Giving yourself a buffer rather than relying 100% on your rental income allows you to ride the ups and downs of life without mortgage stress taking its toll.
Benefits of investing in property
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Long-term capital growth
Over time, property values tend to rise, especially in high-demand locations, offering you the potential for substantial returns on your investment.
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Rental income
Renting out your property provides extra income, iwhich can help cover your loan repayments and provide extra cash flow.
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Tax advantages
You can claim deductions for interest on your mortgage, property maintenance, depreciation on assets and even property management fees.
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Leverage equity
If you own your own home, you can use the equity you’ve built up as a deposit for your investment property, helping you get started with less upfront cash.
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Diversify your portfolio
Property is a tangible asset that can help diversify your investment portfolio, and is typically more stable than other investments like shares.
