Property investment is often one of the best things you can do to future-proof your life. If you invest well and when the time is right for you, you could end up with a passive income. This means that you could have more money to live your dream life, or even retire early, while still enjoying a regular rental income.
Rentvesting is becoming increasingly popular with young Australians looking to grow their wealth. It’s a great option that allows individuals to invest in property while renting. Rentvestors typically live in a more expensive city, such as Sydney or Melbourne, and invest in a more affordable city or region.
If you’ve already purchased a home to live in, you are likely familiar with the process of obtaining an owner-occupier home loan. The investment home loan procedure is largely the same, but there are some unique characteristics that apply to investment properties. In this article, we’ll explain how you can get the best interest rate for your next investment property and what to consider while assessing your home loan options.
Interest rates for investment home loans are typically higher than rates for owner occupied loans. There are also often higher establishment and maintenance fees associated with investment loans. This is to account for the likely return you’ll make as an investor. However, there are even possible tax benefits if you make a loss!
This tax benefit is known as negative gearing. If your rental income is less than your mortgage repayments and expenses, these losses may be tax deductible. And, many investors believe that these losses will eventually be offset by significant capital gains when the property is sold after its value increases.
Another thing to note is that you should not mislead lenders about your intentions for the property. Just because interest rates are lower for an owner-occupied home loan, it doesn’t mean you can simply lie. If you get an owner-occupier home loan with a lower interest rate for a property you intend to rent out, you may be committing fraud.
To get a good home loan deal, you’ll probably need to spend some time researching. Chances are that the first home loan you look at won’t be the right fit for you, so it makes sense to research all your options.
If you have an existing home loan for another property, you may feel inclined to stick with the same lender. While this could be more convenient, it’s not always the right move. Interest rates and home loan packages change over the years and differ considerably between owner-occupied loans and investment loans.
You can use Lendi’s home loan platform to search and compare home loans for your next investment property. Our home loan search and comparison tool takes into account your specific needs and personal circumstances. Try it out now:
Compare your rate with 35+ Aussie banks & lenders in 30 seconds.
With Lendi, you can easily apply for home loans online. You don’t need to waste time lining up at the bank when you have access to over 35 different Aussie lenders at your fingers. Our Home Loan Specialists will help you through the process and are happy to answer your questions before, during and after settling your new investment home loan.
We’ll even negotiate on your behalf if we think we can get you a better interest rate. Book an appointment with one today to start your property investment journey.
Before applying for home loans, it’s key to sort out your finances in order to present yourself as a low-risk borrower. Your credit rating, employment history and income are closely analysed by lenders.
In the months leading up to your loan application, focus on making on-time repayments on any loans (e.g. car or personal) and credit cards. If you’re self-employed or have multiple streams of income, make sure you have sufficient documentation to prove your income.
If your credit score isn’t as good as it could be, or you have some unusual circumstances that may impact your application, you might still have options. Lendi works with a number of lenders who specialise in offering home loans to ‘non-conforming’ lenders. However, you may be charged a higher interest rate to account for risk.
Lenders will consider your likely rental income when determining your borrowing power and assessing your loan application. It’s possible that if your rental income is set to cover your mortgage, your lender might be more willing to offer a better interest rate and home loan. Your debt to income ratio may be determined by your likely rental income.
To maximise your rental income, try to buy a property that is in a high growth or otherwise popular area. One of the biggest drivers of growth in an area is a good school. Families will move to suburbs where there is a reputable school and may be willing to pay more in rent and compete for a place to live.
Banks also see this as a low-risk route. If for whatever reason you default on your loan in the future, your lender will have no trouble selling your property if it’s in a popular area.
Do you want to sell quickly or are you in it for the long-haul? If you plan to sell your investment property within a few years of purchasing, you may want to consider an interest only home loan.
This is a competitive loan type where you only pay off the interest accumulating on your home loan. An interest only home loan can last between 1 and 5 years and your repayments won’t reduce the loan balance. Your interest only repayments will be lower than if you were also paying off the principal (loan amount) and you may be able to claim tax reductions from your interest payments.
For many investors, the goal of an interest only loan is to sell before the end of the interest only period and make a profit. However, since you aren’t building equity from your repayments, this strategy relies on the assumption that your property’s value will increase during this time.
At the end of the interest only period (if you don’t sell the property), your repayments will increase to take into account the principal that needs to be repaid.
Since interest only home loans are risky, it’s important to speak to a financial professional to see if it is right for you. Lendi’s Home Loan Specialists might be able to advise you, so get in touch today.
It’s smart to consider the broader home loan product and not just the interest rate. A low interest rate might not be all that beneficial if there are a bunch of annual fees to pay. Consider what you want in your investment home loan.
For flexibility, consider a home loan with a variable interest rate. Variable interest rates correspond with fluctuations to the RBA cash rate. So, if the cash rate is low, your interest rate will probably also be low and vice versa. You will also be able to make uncapped extra repayments and will have access to loan features, such as an offset account.
For stability, a fixed rate home loan may be more suitable. While fixed interest rates are typically marginally higher than variable rates, they stay unaltered during the fixed period of 1 to 5 years. This means that you can better plan for your finances and don’t have to worry about rising interest rates.
Don’t forget that refinancing is always an option in the future. If your investment home loan interest rate is not as competitive as it could be, consider refinancing.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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