Written by 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.
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Top tips to keep in mind before buying your investment property
Benefits of investing in property
More of your frequently asked questions about investment home loans
Generally, yes – the average difference between investment loan rates and traditional home loan rates is an increase of around 0.2% to 0.4% for an investment loan. The type of loan you’re offered comes down to the intent of the borrower. If you intend to live in the house, you’re called an owner-occupier and will be offered a traditional home loan. If you intend to rent out your new property and take out an investment property loan, it’ll attract a slightly higher interest rate because investment loans are considered riskier by most lenders.
If you don’t have sufficient equity in your home, you can either buy a cheaper property, wait until you save up sufficient money for a deposit, take out a personal loan (either secured or unsecured) to make up the difference you need for the deposit, or ask a family member to act as a guarantor for your home loan. You could also consider paying Lenders Mortgage Insurance (LMI) to enable you to get a loan with a deposit of less than 20%. You should seek financial advice before deciding if any of these options are suitable for your individual circumstances.
Yes – but if you have a fixed rate, fixed-term investment loan, you may find some fees apply if you want to pay your loan off more quickly than originally planned. Variable rate investment loans tend to offer more flexibility and may allow you to pay off your loan with no or fewer costs. Look for a loan that allows lump sum repayments when shopping around if you think it’s likely you’ll want to pay your loan off sooner. If you’re planning to pay your loan off sooner, use this extra repayment calculator to find out how much those extra repayments will shave off your loan term.
Some lenders may specify that you’re not permitted to move into your investment property and live in it as an owner-occupier within a set timeframe of taking out your investment property loan. This may be within a year of you applying for the loan. Speak to your lender if you decide to change which property you live in because it could affect your home loan and you may need to refinance if the purpose of your loan changes.
Most fixed rate investment home loans in Australia are offered for a term of between one and five years, but this may be able to be extended up to ten years in some cases. The longer the term you opt for, the higher the interest rate you may be offered, but the longer the period of certainty and protection from rising interest rates you have. Don’t opt for a fixed rate, fixed-term investment loan if you plan to sell your property soon, or if you plan to change lenders or refinance your loan in any other way. Expensive loan break fees may apply if you ask your lender to change your loan term once you’ve agreed to a fixed-term loan.
By using the equity you have in your home as security for your investment property loan, you’re effectively tying the two properties together. If you do want to sell your home, you’ll have to refinance your investment property loan at the same time you discharge the mortgage on your home loan. Make sure you have an alternative source of security for your investment property home loan before you put your home on the market. Alternatively, wait until you have sufficient equity in your investment property so that no further security is needed to guarantee your investment property loan.
Negative gearing means you borrow money to invest in a property, but the cost of repayments is higher than the rental income you receive. In effect, your investment property makes a loss, which you can claim as a useful tax deduction and reduce the income tax you pay on your regular salary. A positively geared property means the rent you receive is higher than the costs of owning the property, so you gain an additional income but don’t have the tax advantages of negative gearing. Which option is right for your personal circumstances will depend on a range of factors such as your income and what other commitments and investments you may have.
Yes, investing in property interstate is completely allowed and there are no specific restrictions preventing it. Many investors choose to invest in other states where they find better opportunities or more affordable markets. However, it’s crucial to understand the local property laws, taxes, and market conditions before purchasing in another state. Each state in Australia has its own set of property regulations, and you should also consider the costs associated with managing an interstate property, such as travel, property management fees, and possible stamp duty variations.
Yes, you can invest in land instead of a built property. Land investment can be a strategic choice for those looking to develop properties or hold onto land in areas expected to appreciate in value. Financing for land purchases is typically different from standard home loans; lenders often require larger deposits (e.g., 20% to 40%) due to the perceived higher risk of undeveloped land. Additionally, interest rates for land loans might be higher, and lenders may impose shorter repayment terms. If you plan to build on the land, you may be able to combine a land loan with a construction loan, allowing for more streamlined financing.
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