When you’ve decided on the property investment strategy that works for your financial objectives, you’ll need to make sure you’ve selected the right investment loan. Settle on the one that will do the most to help you achieve your goals.
5 Features To Look For In An Investment Loan
Every borrower’s needs/goals are different and it’s important to pick a loan with features suited to your current and future goals.
For example, if your goal is to use rental income to pay down the loan, then our brokers recommend making principle and interest repayments This reduces the principal balance with each repayment cycle.
If your goal is to acquire more investment properties, then making interest-only repayments for a few years may be a good choice, as your repayments will be lower, allowing you to save for a deposit for another property more quickly.
To help with your decision, here are five features you might want in an investment loan.
1. Borrowing Power
Your investment property borrowing power is based on your lender’s assessment of how large a loan you can afford to repay. Some lenders will let you borrow more than others.
So how is your borrowing power calculated?
Most lenders use a basic formula that determines how much you can afford to spend on mortgage repayments each month, and use that figure to determine how much they will allow you to borrow. The formula for determining how big a monthly repayment you can make will be similar to this:
Gross income – (tax + existing commitments + new commitments + living expenses + buffer)
= monthly surplus
Some lenders also take your rental income into account, along with any negative gearing and other tax benefits you have when calculating your borrowing power. Try our home loan borrowing power calculator for a general idea on how much you qualify for.
If you need help maximising your borrowing power as an investor, call us on 1300 889 743 or enquire online to get connected to an expert.
2. An Offset Account
An offset account allows investors to hold savings in a separate account that will be credited towards their loan balance when calculating the monthly repayment. It’s like an extra bank account linked to the loan; you can use it to save for your next property. This way, you can have cash on hand to pay the deposit without incurring redraw fees.
Also, if you need to cover expenses for your investment property, you can use funds from your offset account with no penalty or fees charged.
Here’s an example: Maya is an investor with a home loan of $400,000 at an interest rate of 5.25% and a 25-year loan term. With no offset account, she will pay $319,000 in interest over the course of the 25-year loan term. However, if she decides to keep $50,000 in a 100% offset account, she will save $40,000 in interest repayments.
3. Lower Interest Rates
There are big differences in rates for loans. Some lenders charge much more if you choose interest-only repayments. A Home Loan Experts broker can be particularly helpful here. We know which lenders will offer the best deal for you. Get an idea of the current market rates here.
4. Line Of Credit
A line of credit acts like an overdraft account that allows you to withdraw cash up to a set limit. When you add a line of credit to your investment property loan, you are able to access the equity you’ve built up in the property through withdrawals.
A line of credit works like your credit card. You can use the funds when you need them and interest charges apply only to the amount you withdraw. As an investor, you can access these funds for emergency repairs and other costs associated with your property.
Keep in mind that lenders generally charge higher interest rates for home loans with a line of credit.
5. Interest-Only Repayments
With interest-only payments on an investment loan, each repayment is only the calculated interest due. An interest-only loan lets you minimise repayments and maximise cash flow; the downside is that you are not paying down the principal. An interest-only period on a loan is usually between one and five years.
One other feature that is worth looking for, when investing in multiple properties, is to have each as a single security, rather than having multiple loans cross securitised. Some lenders, especially some banks, like to secure all of the loans you have with them against all of the properties. This means that if you have problems paying off any one loan, they can force you to sell any of the properties to pay it off.
The following features are usually not top priorities for most borrowers, either because they are offered on nearly all products or are rarely used. Again, all investors are different. Consider what is best for you.
- Redraw facility: All variable-rate loans have a redraw facility.
- Repayment holiday: Most investors don’t use these.
- Flexibility with repayment frequency: Interest-only investment loans are common and most lenders require interest-only loans to have monthly repayments.
- Extra repayments: Nearly all variable-rate loans allow extra repayments.
Talk To An Expert Broker
Our specialist mortgage brokers will help you compare the different investment home loan options accessible to you. Browse among the 50-plus lenders on our panel to decide on the loan that fits your financial goals the best.
To talk to an expert broker, simply call us on 1300 889 743 or enquire online for free assistance.