What’s an investment property loan?
While you might think you can take out a standard loan like other homeowners, there’s a slight difference between investment home loans and regular ones.
Investment property loans typically have higher interest rates than owner-occupied one, because of the risks that can come with property investment.
But otherwise, both types of home loans usually have similar, if not the same, features. Some of the features on our investment home loans include:
- No monthly or annual fees: You can pocket the extra money into your savings or put it towards something else, like a holiday.
- You can choose your repayment frequency: This means you can pay weekly, fortnightly, or monthly. It all depends on what works best for you and your finances.
- Free repayments and redraw: You can make as many extra repayments as you want for free. However, there is a repayment cap of $30,000 for fixed rate loans6 . You can also redraw as much or as little of those extra repayments4 – just in case you need it for an unexpected expense.
- Interest only repayment option: : You can also choose an interest-only repayment option, which tends to be popular among property investors.
What are the different types of investment home loans?
Fixed rate loan
A fixed rate loan is when your home loan’s interest rate is locked in for a fixed period of time. Because the rate won’t change, investors have certainty on their repayments because it’s the same amount every month. Your loan won’t be at the whim of interest rate rises, but your loan rates will also stay the same if interest rates go down.
Variable rate loan
A variable rate loan is when the interest rate on your loan can change over time. This means if interest rates go up or down, then the minimum rate on your home loan will too. If you decide to refinance your home loan, you might avoid paying break costs to end the loan early because it’s a variable rate.
Offset variable loan
An offset variable loan lets investors use their offset account to reduce the amount of interest rate charged to your loan. While your repayments will stay the same, more of each repayment will go towards the principal part of the loan because you are being charged less interest.
Split loan
A split loan is when investors get the best of both worlds, benefitting from both fixed and variable rates. You can split your home loan across variable and fixed loan products at whatever ratio you like. For example, you can go an even 50-50 between variable and fixed rates. Or, you can go the absolute minimum for the fixed rate, which is $10,000 at Great Southern Bank, and use a variable rate for the rest of the loan.
Which repayment option works for you?
Investors can choose between two repayment options – interest only and principal and interest.
Interest only
This is a popular choice for lots of investors. This is because you just pay the interest on the amount you borrowed, rather than both interest and principal. Paying interest only allows you to maximise your cashflow because your repayments will be a bit less than principal and interest repayments. When you add capital growth and passive income to the mix, you can be on the path towards investment success.
Principal and interest
This type of repayment is when you pay back the amount you took out and the interest charged. Lots of people with owner-occupied home loans use this type of repayment method. But there’s nothing stopping investors from doing it too. Because you’re repaying the amount you borrowed, you are working towards reducing the overall loan balance over time while also increasing your equity in the process.
You can use our repayments calculator to see which option is best for you.
How can you secure an investment home loan?
- Understand your borrowing power: This can help you reflect on your financial situation and manage your expectations. It’s also great if you’re trying to figure out if you should use your existing equity or savings for the deposit. Knowing your borrowing capacity can also help identify what saving and spending habits you can change to secure an investment home loan.
- Sort out your finances and other debts: Getting a loan approved comes down to the prep work. This includes paying off as much debt as possible, like other loans and credit cards. This can demonstrate your ability to manage your money well, while also helping you manage your repayments when you take out the new loan.
- Improve your credit score: Your lender will do a credit check to see if you’ve managed previous credit well. Having good credit history can help you show your lender that you’re willing and able to pay off your new loan. If you want to check your credit score first, then you can get a free report from places like Experian, illion and Equifax.