If you want to take out a home loan to buy an investment property in Australia, you will generally have one of three options available to you. You can take out a fixed-rate loan, meaning that your interest repayments will remain steady, or a variable-rate one, meaning your interest will potentially fluctuate up or down. You could also take out a split rate loan, which is a combination of the other two, allowing you to utilise the features of both.
If you’re contemplating a three-year fixed investor home loan, here are some things that might help inform your decision:
What is a 3-year fixed investor home loan?
A three-year fixed investor home loan is one in which the interest rate you’ll pay on the loan is locked in or ‘fixed’ for a period of three years. Locking your rate in means that for the entire three-year period, your interest repayments will remain the same, irrespective of any market forces or whether your lender chooses to raise or lower their interest rate.
It is worth keeping in mind, though, that if you plan to purchase an investment property, you may find that your lender charges you a slightly higher interest rate and offers you a lower loan-to-value ratio (LVR) than if you were purchasing a home to live in. The reason for this is that lenders view investment home loans as riskier than other kinds, due to the potential for volatility in the rental market.
In other respects, though, two-year fixed home loans for property investors are similar to those for owner occupiers.
What are potential advantages of a 3-year fixed investor home loan?
Potential benefits of fixing your investor home loan, either for three years or for a different period of time, include:
- Protection from interest rate rises: If your lender decides to raise interest rates, your interest repayments will remain the same for the three-year period of your loan and will not go up.
- A sense of certainty in your repayments: Along with protection from interest rate rises comes the certainty of knowing your interest rate will not fluctuate, meaning you can plan your budget accordingly.
- Potentially lower fees: Variable rate home loans come with various bells and whistles like offset accounts and redraw facilities. Choosing a fixed home loan that foregoes these can mean paying lower fees.
What are potential drawbacks of a 3-year fixed investor home loan?
Potential downsides of fixing your investor home loan, either for three years or for a different period of time, include:
- Missing out on lower interest rates: If your lender decides to lower interest rates after your three-year rate is locked in, you will not get to take advantage of them as you will be set paying the same rate.
- Potentially paying break fees: If you do decide to end your fixed term loan early for whatever reason, you will generally be charged break fees by your lender, and these can be expensive.
- Lack of features: Offset accounts and redraw facilities can be a useful way to streamline your everyday finances, and you may feel that you’ll miss out on these options with a fixed term loan.
- Inability to make additional repayments: Variable rate loans will typically allow you to make additional repayments to pay off your loan more quickly, but fixed rate ones will not, except in occasional circumstances, depending on the lender.
Can you break a 3-year fixed home loan?
It is possible to break a fixed home loan before the period has ended, although generally speaking, if you do so, your lender will require you to pay a ‘break cost’ or a ‘break fee’. This is an amount that is charged by lenders to make up for money they might have missed out on because of you breaking out of your loan early.
Explore further: Breaking a fixed-rate home loan: What are break costs?
Break fees can vary in cost, and are usually calculated with respect to:
- the interest rate that you locked in for your home loan (compared with the current interest rate),
- how much time remains on your fixed-rate term, and
- the amount of money you originally borrowed for your home loan.
How long can you fix a home loan for?
How long you can fix a home loan will depend on what is offered by your preferred lender, along with your personal needs and circumstances. You might opt for a shorter timeframe like one, two or three years, or otherwise, if you are happy with a fixed rate for a longer period of time, you could opt for five or even ten years.
How do you lock in a low interest rate?
If you are contemplating a fixed loan for your investment property, it is important to keep in mind that the interest rate you pay will be locked in on the day you settle on the property, rather than the date you apply. This could mean that the rate you ultimately end up paying for your three-year fixed period could be higher than you anticipated.
Some lenders will offer you the ability to lock in a guaranteed rate for a fee, so if you are concerned about rates changing, it may be worth asking your lender if they are able to do this for you.
What happens at the end of a fixed investor home loan term?
When any fixed home loan comes to an end, whether you locked your rate in for three years or longer, it will typically revert to a variable rate. At this point, if there is still a balance to pay off on your home loan, you can:
- Remain on a variable rate with your lender: If you are happy with your lender’s variable rate, you have the option to simply stay put.
- Refinance with your current lender: If you want, you can refinance to a new fixed rate with your current lender, or to a split fixed and variable loan.
- Refinance with a new lender: If you want, you can refinance your home loan with a new lender, either at a fixed, variable or split rate.
What happens if you are untruthful on your investor home loan application?
When borrowing money to purchase an investment property, it is important to be truthful about the reasons you are applying for the loan. Lying on a home loan application can have serious consequences, which can include:
- being denied a home loan
- receiving a black mark on your credit score
- difficulty getting a loan in future, as other lenders may be hesitant to offer one to you
If a lender later finds out that you were untruthful on your home loan application, they may decide to recall your home loan. This typically means that you will be given 30 days in order to pay off the balance of the loan, after which the property will be sold off.
How do you compare fixed rate investor home loans?
If you’re in the market for an investment property and wondering about the available three-year fixed rate loans, you can start your search by comparing home loans with Canstar. Each year, Canstar gives out Home Loan Awards to the lenders that offer outstanding value to Aussie home buyers. The winning providers in the Investment Fixed Home Lender Award category may be able to offer you an investor home loan at a competitive rate.
Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD.
Cover image source: Leszek Glazner/Shutterstock.com