Property investment remains a popular wealth creation tool in Australia, but the success of your investment not only depends on choosing the right property but also the right investment loan.
Yes, the type of loan you choose will greatly impact your cash flow. Thus, investors must think in what manner they would be repaying the loan before choosing a financial product in line with their investment strategy.
Here’s a run-down of the different types of loans investors can choose from:
Principle and interest (PI) loans – A PI loan is mostly preferred by owner-occupiers who want to pay off their mortgage as soon as possible to own their home. In a PI loan, the repayment amount comprises interest and a part of the principle so that you pay some of the original amount along with the interest right from the outset. Gradually, as the principle reduces, so does the interest payable on it. Consequently, a larger part of the repayment is applied towards the principle in later years, vanquishing the debt gradually. Of course, you know by now that the simplest way of owning your home sooner is by making larger or more frequent repayments (read more).
Interest only (IO) loans – With an IO loan, you can choose an interest only period of up to five years, wherein you only pay the interest on your mortgage, resulting in lower repayments during the period. While investors can benefit from tax deductions applicable on interest repayments and improved cash flow (due to lower repayments), it is important to remember that repayments can increase by over 40 percent once the interest-only period is over. Besides, you do not build any equity in your home during this period, and if, unfortunately, the property prices decline, you could end up owing more than your property’s worth.
According to research, a third of Australians with IO loans are not aware of the financial product on their hands. This means they could land into mortgage distress once their IO period is over. For owner-occupiers, it is generally advisable to take out a PI loan, so that they can build equity in their property gradually.
To promote owner-occupier activity in the market, APRA has levied much stricter regulations around IO loans lately. Currently, banks are required to limit their interest-only lending to 30 percent of the total loans on their books. Besides, investors generally pay more than owner-occupiers for IO loans. However, IO loans continue to remain popular with investors due to the tax benefits and lower repayments that enable investors to apply the extra cash towards other properties. If you think an IO loan is in line with your investment strategy, contact a mortgage broker for most competitive and best-fit home loan deals for your requirements.
Equity loans – If you already own a property, it is possible to use the equity in one property to secure a home loan for your next investment property. You can cash into the equity in your property to fund the deposit on your investment loan. Generally, banks allow you to borrow up to 80 percent of the equity in your home. You can borrow a lump sum against the equity in your home or open a line of credit that acts like a credit card with a large credit limit while your property serves as security for your mortgage. With a line of credit home loan, the best part is you only pay interest on the amount you draw down.
Construction loans – In case you plan to construct your own property, you could also choose a construction loan that can save you a lot of money on interest. A construction loan is usually drawn upon the major stages of construction, which means you only pay interest on the amount you use. Learn more about construction loans here.
Good to know…
Generally speaking, investment loans are not very different from owner-occupier loans. However, to create a successful property portfolio you need to have an investment strategy that will determine the kind of loan you require. Apart from choosing how you would be making the repayments (PI or IO), you also must decide on the type of interest rate that suits your financial strategy. There are several variable, fixed and split rate loans available in the market to choose from. However, with stricter lending criteria against investment loans, it is advisable to have a mortgage broker by your side who can guide you to the right lender and financial product for your needs.
According to a recent survey, 70 percent Australians who took professional advice claimed to have benefited from the guidance. Whether you are a first-time investor or a seasoned property baron, don’t feel shy of seeking professional help from a broker – in today’s times, it is the quickest way to score a competitive deal. The best part is brokers don’t charge their customers anything and often pass on a part of their commission to clients, which means more savings for you! Find a verified mortgage broker in your local area, instantly, here.
By Vidhu Bajaj,
HashChing Content Writer