There are moments when a loan does not match the intention of a person who wants to buy a property. When you have the intention of buying a property to make an income-generating venture instead of a principal place of residence, it may be time to consider an investment loan.
Applying for this type of loan entails different requirements and involves a deeper examination of your financial capacity. If you are wondering if you should apply for one, this blog post will be your guide to understanding investment loans and how to get the best investment loan rates.
What are investment loans?
An investment property loan is money borrowed to be used for investing in apartments, houses, shares, or commercial property. You will be earning rent from these properties, but you still have to pay the interest, taxes, and other costs related to owning the house or apartment. Some of the extra expenses you will have to pay are repairs, insurance, and council rates.
Investment Property Loans versus Regular Home Loans
The primary difference between investment property loans and regular home loans are usually taken by people who want to own and occupy a residential property. On the other hand, investment loans are intended for real estate properties that will be made into income-generating properties.
This table will further clarify the differences between the two kinds of loans.
| Investment Property Loans | Owner Occupied Home Loans | |
| Interest Rate | Higher interest rates | Lower interest rates |
| Loan to Value Scale | The maximum loan-to-value ratio is lower which will require a higher deposit. | The maximum loan-to-value ratio is higher and requires a low deposit. |
| Taxes | You may claim tax | Ineligible for tax deduction deductions on interest charges. |
| Other Fees | No difference in fees. | No difference in fees. |
| Stamp Duty | Follows the same rules as regular home loans but you may not qualify for first-home buyer grants or stamp duty concessions. | Same rules for both however can be exempt for first home buyers. |
How to Find the Best Investment Loan Rates
To get the best investment loan rate that matches your financial capabilities, you need to compare the rates from various lenders. Aside from the rates, there are other factors you need to consider.
Interest rate
A more affordable interest rate will mean lower loan repayments.
Extra charges
Examine the other fees that come with the loan. If you can avoid some fees, it will make your loan more economical.
Features
Some features, like an offset account, help you save while reducing interest fees.
Loan to Value Ratio (LVR)
LVR refers to the amount you are allowed to borrow concerning your investment property’s value. If you can pay a small deposit, lenders may allow high LVRs. However, proceed with caution because a small deposit will push you to borrow more and incur higher fees, along with the lender’s mortgage insurance.
Financial Capacity
Different lenders have different criteria. It is important to compare lenders because that is how they will assess your borrowing capacity.
Steps to Secure an Investment Loan
Lenders see investment property loans as high-risk expenses, so getting approval for an investment property loan can be difficult. To help you increase your chances of having a successful investment loan application, here are some highly recommended steps to follow:
- Prepare a substantial deposit.
- Regularly check your credit score. There are moments when you miss out on red flags or errors that have to be addressed before you apply for a loan.
- Cut back on unnecessary spending at least three months before your application.
- Do your research on properties and lenders.
- Consult with a mortgage broker. Mortgage brokers specialise in assessing your financial health and capacity to take on loans. They can help you see aspects you’re missing.
Investment Property Statistics in Australia
According to Property Update AU’s March 2024 blog, the most recent information provided by the Australian Taxation Office (ATO) indicates that approximately 2,245,539 Australians, comprising roughly 20% of the nation’s 11.4 million taxpayers, possessed an investment property during the 2020-21 fiscal year.
This data, current as of June 2023, signifies that around 2.24 million taxpayers in Australia are engaged in property investment, collectively possessing 3.25 million investment properties.
These figures suggest a notable interest among Australians in investment properties.
How to manage investment loans effectively
Having a huge loan can be overwhelming, but you can make the most of it if you manage it properly. Here are some simple ways to ensure that your loan will improve your life.
Evaluate Your Debt
Start by honestly assessing your debt, including all types, such as mortgages, credit cards, car loans, and other financial obligations. Knowing your total debt, interest rates, and monthly repayments is crucial for effective debt management.
Prioritise Repayments
Different debts carry varying interest rates and terms, making it important to prioritise repayments strategically. Methods like the snowball or avalanche approach can help decide which debts to tackle first, either starting with the smallest debts or those with the highest interest rates. Debt consolidation may also be an option to streamline repayments, although its suitability depends on individual circumstances.
Develop a Repayment Plan
After assessing debt levels and prioritizing repayments, create a repayment plan based on your income and expenses. A detailed budget helps identify areas where expenses can be reduced to maximize funds available for debt repayment. Seek assistance from financial counsellors if needed, such as through resources like the National Debt Helpline.
Negotiate with Creditors
Negotiating better terms with creditors can significantly impact debt management. Whether it’s lowering interest rates or exploring refinancing options, reaching out to creditors can lead to reduced financial burdens. Financial counsellors can offer guidance through this process if it seems daunting.
Conclusion
Understanding investment loans is essential for individuals looking to venture into investing. Unlike regular home loans, investment loans cater to income-generating investments and come with distinct features and considerations. By comparing rates, understanding fees, and assessing financial capacity, borrowers can secure the best investment loan for their needs.
However, obtaining approval for an investment loan can be challenging, requiring meticulous preparation and consultation with experts such as mortgage brokers. Despite the complexities, Australians’ significant interest in investment properties underscores the potential benefits of effective loan management.
By evaluating debt, prioritizing repayments, and negotiating with creditors, borrowers can navigate their investment loans successfully, paving the way for financial growth and stability in property investment endeavours.
Ready to elevate your investment strategy? Visit our Investment Loans page to find the best rates and start securing your financial future today!