Investment Property Home Loan

An investment home loan is specifically designed for purchasing property as an investment, rather than as a primary residence. These loans are perfect for acquiring rental properties or properties with the potential for value appreciation, offering opportunities for income and profit.

When investing in property, the right loan can make all the difference. Home Loan Experts is here to guide you through the process, helping you understand the details and make informed decisions on your path to successful property investment.

Investment Home Loan Types

Choosing the right investment home loan is important for maximising returns and managing your financial obligations effectively. Here are five common types of investment loans to consider:

• Principal and interest loan: This is the standard loan type, where borrowers make repayments that both pay off the principal amount and pay the interest charged for the pay period. This type of loan is typically chosen by investors who want to gradually reduce their debt while building equity in the property over time.
• Interest-only loan: You pay interest only for a set period, usually 1-5 years, keeping your initial repayments lower. This option might be suitable for investors focusing on capital growth and looking to minimise their short-term expenses. There is also a strategic choice: whether you plan to sell the property before the interest-only period ends or refinance for better terms. Be aware that this option will extend your loan term, because you are not paying any of the principal during the interest-only period.
• Fixed-rate loan: A fixed-rate loan offers a set interest rate for a certain period (typically 1 to 5 years), which means your repayments remain consistent during that time. After the fixed period ends, your rate changes to the lender’s revert rate, which will be variable. The predictability of a fixed term can be valuable for investors who want certainty in their budgeting and protection against potential interest rate hikes.
• Line of credit loan: A line of credit loan allows you to borrow up to a specified limit and pay interest only on the amount you’ve drawn. It’s like having a credit card but with your home equity as collateral. This loan type is flexible and can be used for various investment-related expenses, such as property improvements or purchasing additional assets. This loan suits investors who want flexible access to funds for property investments or improvements without the need to take out multiple loans.
• Split Loan: A split loan allows you to divide your loan into multiple parts, each with a different interest rate and repayment structure. You might split your loan into a fixed-rate portion and a variable-rate portion. For example, if you have a $600,000 investment property loan, you might choose to fix the interest rate on $300,000 and keep the remaining $300,000 on a variable rate.

Who Qualifies For Investment Home Loans?

The approval criteria for investment loans is quite complicated, especially if negative gearing is involved.

Investment loans are generally a higher risk than standard home loans and, as such, you need to be in a strong financial position to qualify.

The basic lending requirements for investment home loans are:

• You should have 5%–10% in genuine savings.
• If you are borrowing more than 90%, some lenders like to see equity in other properties (if this is not your first investment property).
• A good credit history.
• An above-average credit score.
• Stable employment.

How Much Can I Borrow For An Investment Property?

You can borrow up to 95% of a property’s value for an investment property, though this usually requires Lenders Mortgage Insurance (LMI).

If you have a guarantor or use equity from another property, you might be able to borrow over 100% of the property’s value.

To estimate how much you can borrow and understand your cashflow, use our Investment Property Cashflow Calculator.

Investment Home Loan Approval Process

Here’s a quick overview of the investment home loan approval process:

• Pre-approval: Before you start property hunting, getting pre-approved for a loan is wise. Provide your financial details to a lender or mortgage broker to find out how much you can borrow. Pre-approval also strengthens your offer when buying a property.
• Documentation: Once you’ve chosen a property, gather and submit necessary documents, such as proof of identity, income and details of current debts.
• Loan application: Submit your formal loan application, including all your financial details and the property information.
• Property valuation: The lender will assess the property’s value to ensure it matches the loan amount.
• Assessment and approval: The lender reviews your application and the property valuation. If everything is in order, it will grant formal loan approval.
• Conditional approval: Sometimes, approval comes with conditions that must be met before finalising the loan. This could involve providing additional documentation.
• Loan offer: Review the loan offer carefully. It includes the loan amount, interest rate, and terms. Once you’re satisfied, accept the offer.
• Settlement: The lender transfers the funds to complete the property purchase. Finalise any legal and administrative tasks to finalise the property transfer.

Explore a detailed breakdown of each step in the loan process on our page on the Loan Application Process.

Count on us to make your loan journey worry-free, with expert help at each step. Call 1300 889 743 or get started with our free online assessment form.

What Fees And Costs Are Associated With Investing In Property?

Investing in property involves several fees and costs beyond the purchase price. Here’s a rundown of the key expenses you should anticipate:

• Lenders Mortgage Insurance: Required if you borrow more than 80% of the property’s value.
• Stamp Duty: A state government tax based on the property’s price or value. The cost varies by location and can be a major expense.
• Legal and Conveyancing Fees: Costs for a solicitor or conveyancer to handle legal paperwork and property transfer.
• Inspection Costs: Fees for building and pest inspections to uncover potential issues and avoid unexpected repairs.
• Ongoing Costs: Once you own the property, there are ongoing costs such as property management fees, insurance, maintenance, and council rates. These are important to budget for, as they can impact your rental income and returns.
• Settlement Costs: Administrative fees for registering the property and transferring ownership.

Understanding these costs helps you better plan and budget for your property investment. Check out our Property Purchase Costs resource for a detailed breakdown of the expenses involved in buying a house.

Tax Implications Of Owning Investment Properties

Owning investment properties in Australia involves several tax implications. Here’s a summary of the key aspects you need to consider:

• Rental Income: Income earned from renting out your property must be declared on your tax return. It is taxed at your marginal rate, so it’s important to account for this income in your financial planning.
• Capital Gains Tax (CGT): When you sell the property, any profit made is subject to CGT. However, if you hold the property for more than 12 months, you may be eligible for a 50% discount on the capital gain.
• Deductible Expenses: You can reduce your taxable income by claiming deductions for various expenses related to your property, including:
  • Interest on mortgage
  • Property management fee
  • Maintenance and repairs
  • Council rates and insurance
• Capital Works Deduction: You can claim deductions for the cost of constructing or renovating the property. This includes structural improvements and repairs that extend the property’s useful life. You can claim a deduction of 2.5% per year for up to 40 years on eligible expenses.
• Negative Gearing: If the costs of owning the property (such as mortgage interest, management fees, and maintenance) exceed the rental income, you can claim the loss as a deduction against other income, potentially lowering your overall taxable income.

Understanding these tax implications and leveraging available deductions and concessions can greatly impact your investment’s profitability. Seek personalised advice from a tax professional to ensure you comply with current regulations.

Making An Offer On An Investment Property

When you’re ready to make an offer on an investment property, follow these key steps:

• Research the Market: Start by investigating market trends. Analyse recent sales data and current market conditions. Use online tools, consult real-estate agents, or review property reports to determine the property’s value.
• Determine Your Offer Price: Set a competitive offer based on your research. Consider consulting a property valuation expert or real-estate agent to refine your offer.
• Prepare Your Offer: Draft a formal, written offer; this is often facilitated by the real-estate agent. Your offer should include the proposed price, deposit amount, and any conditions (such as subject to a building inspection or finance approval).
• Submit and negotiate: Submit your offer to the seller or their agent. Be prepared for negotiations, as counter-offers are common. You’ll likely need to negotiate the final price and terms until both parties agree.
• Sign the contract: Once an offer is accepted, review the formal contract carefully with a solicitor or conveyancer. The contract will outline the terms, including the settlement date. At this stage, you’ll also pay the deposit.
• Final Steps: Before finalising the purchase, you should conduct any necessary property inspections (such as for the building or pests) and secure your financing. Finalise the loan and handle all administrative tasks required for settlement.

These steps will help you make an offer and secure your investment property. For personalised assistance, our mortgage brokers are here to help.

Property Management Tips For Investors

• Use resources like the Australian Bureau of Statistics and real-estate platforms to understand local demographic and economic trends. To further enhance your knowledge, explore these 10 Factors Affecting The Property Market, which provide deeper insights into what drives changes in the real-estate market.
• Connect with professionals like real-estate agents, accountants and property managers who specialise in property investments.
• Maintain a long-term perspective on property investment, preparing for market ups and downs.
• Always consider potential exit strategies to ensure your property remains attractive to future buyers or investors.
• Work with a tax adviser to claim all possible depreciation, maintenance, and interest deductions. These are essential for maximising your investment’s financial performance, as they affect both capital gains and rental yields positively.

Property Investment Guide 101

Learn the ins & outs of investing in properties, from an experienced property investor and founder of Home Loan Experts, Otto Dargan.