What is an investment home loan?
An investment loan is a home loan you take out to fund the purchase of an investment property. If you plan on buying a property and renting it out to bring in an income, or holding it for a period before selling it (hopefully for a profit), then an investment home loan might suit your needs.
Interest rates on investment home loans are typically higher than on similar owner-occupied home loans, though the rate you're offered will depend on multiple factors, including your deposit, financial circumstances, and the lender you go with.
How to compare investment property loans
If you’re looking to purchase an investment property and want to compare investment home loans, it’s worth considering how a loan might fit your borrowing needs and investment goals.
While interest rates are an important factor, also keep in mind the type of loan, the level of flexibility with repayments, and any features that might be important to you. Canstar's home loan comparison tool lets you compare investment home loans from a range of lenders, while our Outstanding Value Home Loan Awards recognise lenders delivering value for borrowers across the board.
How does an investment property mortgage work?
Investment home loans function in much the same way as other home loans do. A lender will loan a property buyer a sum of money, which is then paid back in regular instalments by the borrower, with interest added at a rate that's either fixed or variable.
If you plan to live in the property, you will apply for an owner-occupied home loan. If you plan to rent it out, you will apply for an investment home loan.
As lenders generally consider investment lending higher risk, investment home loans often have higher interest rates and more strict lending criteria.
What types of investment loans are available?
When you take out an investment loan, you may be able to choose from these common interest rate options:
- A fixed interest rate: Your interest rate will remain the same for a set period of time, regardless of the market.
- A variable rate: Your interest rate may go up or down over time as the lender adjusts to changing market conditions.
- A split rate: A percentage of your loan is subject to a fixed rate, and the rest is subject to a variable rate.
- Principal and interest repayments: A portion of each repayment will go towards repaying the outstanding loan balance.
- Interest-only repayments: You'll only pay interest accruing on the loan balance for a set period, typically between one and five years.
Whether you want a fixed or variable rate, or to make interest-only or principal and interest repayments, can also affect the rate you're offered. Fixed rates are designed to give borrowers repayment certainty for a set period, so lenders price them based on where they expect interest rates to be in the future, variable rates can rise or fall over time, while interest-only loans may cost more as they generally involve a higher level of lending risk.
How to apply for an investment property loan
Applying for an investment mortgage is a similar process to applying for a loan for a house you intend to occupy.
You might start by comparing investment home loan interest rates available or reaching out to a mortgage broker.
Once you've identified your ideal home loan, you can apply directly with your chosen lender or your broker can submit your application for you.
You'll need to provide all the normal identification docs, as well as proof of your income, assets, and liabilities, and information on the property you want to buy.
Am I eligible for an investment home loan?
As with any other type of loan, lenders will want to get a full picture of your finances before approving you for an investment mortgage. This typically means looking at your income, savings, and credit history, as well as any debts you might have, and any equity in other properties.
When buying an investment property, the lender will also need details about the home you would like to buy (unless you’re seeking pre-approval before you’ve started looking). It may also consider the rent you may earn from it, vacancy rates in the area, how much the property might cost to maintain, and other factors.
It will use this information to determine how much it believes you’ll be able to pay back.
These factors may also influence the interest rate a lender offers. Borrowers with a larger deposit, strong credit history, and lower loan-to-value ratio (LVR) may qualify for more competitive investment home loan rates, although criteria differ between providers.
Lenders typically attach stricter approval conditions to investment mortgages than other types of home loans. This is thanks to such things as the potential for rental properties to be vacant, as well as expenses associated with maintenance, and the risk of damage from tenants.
How much of a deposit do you need for an investment home loan?
While the deposit you need will ultimately depend on the price of the property you wish to purchase, investment home loans often require lower LVRs than owner-occupier mortgages, meaning you may be required to pay a larger deposit upfront. For example, a bank may approve your loan for 80% of the property value, in which you must pay the remaining 20% as your deposit.
A larger deposit may also improve your borrowing position and could help you access more competitive investment home loan rates.
If you have a smaller deposit, some lenders may allow you to take out an investment home loan if you also pay for Lenders Mortgage Insurance (LMI) or put forward additional security for the loan.
How can property investors get the best home loan rates?
If you are looking for the best investment home loan interest rate, it’s important to compare options from multiple lenders. Even a relatively small difference in interest rates can have a significant impact on the total amount of interest you’d pay over the life of a loan.
However, the loan with the lowest advertised interest rate isn’t always the cheapest option overall. In addition to the interest rate, pay attention to:
- The comparison rate
- Fees attached to the loan
- The features available, particularly if you expect you'd benefit from an offset account or redraw facility
When you have an idea of the rates on offer in the market, you may decide to approach lenders directly to negotiate a deal. To maximise your chances of being offered a discounted rate, you’ll likely want to demonstrate you’re a reliable borrower. One way to do this is to save up as much money as possible for a property.
If you already have another property, either paid off in full or in part, you may have equity in that property, and you may be able to use this equity as a deposit.
What are the pros and cons of owning an investment property?
There are some potential advantages and disadvantages to owning an investment property, and it’s important to consider these carefully (or even reach out for professional help) before purchasing one.
Potential benefits of an investment property
The possible upsides of owning an investment property include:
- Having a source of passive income
- Potential tax advantages, as some of the costs of buying and owning an investment property may be tax deductible
- Potential to see an increase in the value of your investment, thanks to the fact that house prices in Australia have generally grown over time (though, past performance isn't an indicator of future performance)
- Potential to grow equity in your investment property, which you might use as security when applying for other loans in the future
Possible drawbacks of an investment property
The potential downsides of owning an investment property include:
- Possibility of the property sitting vacant for a time, meaning you’ll need to pay the mortgage without incoming rent
- Risks posed by tenants, who might damage the property or cost you legal fees if you need to initiate eviction proceedings
- Cost of maintenance and expenses, although these may be offset with tax deductions
- Potential capital loss or, if the market takes a turn, the value of your property could end up lower than the balance of your home loan, putting you in negative equity
What is negative gearing?
Negative gearing is a tax term used to describe a situation in which the tax-deductible expenses brought on by an investment property are more than the income it generates.
Depending on the type of property and when it was acquired, eligible investors may be able to deduct their excess losses against their other taxable income streams.
Negative gearing rules change over time, so it's important to understand how the current rules apply to your circumstances before claiming.
What is positive gearing?
A positively geared investment property generates more in rental income than it does in expenses, such as loan repayments and maintenance costs. A positively geared property can mean more cash flow. However, you may need to pay tax on any income generated.
What is capital gains tax?
If you sell an investment property for more than you paid for it, it’s likely you’ll need to pay capital gains tax (CGT) on the profit. In Australia, capital gains tax forms part of your overall income tax, rather than being a separate tax.
The amount of capital gains tax you pay will depend on a range of factors, including how long you've owned the property, your taxable income, and whether you're eligible for any concessions or discounts.
Understanding how capital gains tax works can be an important part of calculating the overall costs and potential returns of an investment property. Because tax rules can be complex and vary depending on your circumstances, it's potentially worth seeking professional tax advice.
