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Helpful Information

What is an investment home loan?

An investment loan is a home loan that you take out specifically to fund the purchase of an investment property. If you plan on buying a property in order to rent it out and earn an income from your tenants, then you might decide to take out an investment property loan to fund this purchase.

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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, typically with interest included at a fixed or variable rate.

The difference comes down to what you intend to do with the property. If you plan to live in it, then you will apply for an owner occupied home loan, whereas if you plan to rent it out, then you will apply for an investment home loan.

Learn more: Owner-Occupied vs Investment Property

How do you 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. If you are curious about your options, you can compare investment property loans using the tool at the top of this page.

If you wish to know more, you can also read Canstar’s guide to what lenders look for in a home loan application.

What are the requirements 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 will typically mean looking at your income, savings and credit history, as well as any liabilities and debts you might have, and if you have any equity in other properties.

The lender will also need details about the property you would like to buy (unless you are seeking pre-approval before you’ve started to look), and will consider the possible rent you may earn from it, vacancy rates in the area, how much the property might cost to maintain, capital growth potential, and other costs.

The lender will use this information to determine the size of loan they believe you will be able to pay back. While the lender will consider the potential rental yield of the property you plan to purchase, your current income will likely be a key consideration.

Lenders typically attach stricter approval conditions to investment mortgages because they are seen as higher risk 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.

Learn more: What you need to know if you’re applying for an investment loan

How much of a deposit do you need for an investment home loan?

While the size of the deposit you pay will ultimately depend on the price of the property you wish to purchase, investment home loans often require a lower loan to value ratio (LVR), meaning you’ll be required to pay a larger deposit upfront.

LVR describes the maximum proportion of the value of your home that can be loaned out to you. 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.

Some lenders may permit property investors to pay a lower deposit in exchange for taking out Lenders Mortgage Insurance, or if you use another property as security for the loan.

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What types of investment loans are available?

When you take out an investment loan, you will choose between a fixed interest rate, which means your interest repayments will remain the same over the lifetime of the loan, or a variable rate, which means they may go up or down as the lender adjusts its interest rates to suit the wider economic environment.

You can also apply for a split loan, which will allow you to choose what percentage of your loan is paid back at a fixed rate, and what percentage is paid back at a variable one. You can also choose an interest-only loan, for which only the interest portion will be paid off for a set period, typically 1-5 years.

Rates listed on Canstar’s database of more than 4,000 loans show that, on average, the interest rates for investment loans will often be higher than those charged on owner occupied loans. This is once again because lenders tend to view investment home loans as riskier than other types of mortgages.

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What are the pros and cons of owning an investment property?

There can be a number of potential advantages and disadvantages to owning an investment property, and it is important to consider these carefully before purchasing one.

Potential benefits of an investment property

The possible upsides of owning an investment property may include:

  • A source of long-term income, provided that it is positively geared (you have paid off the accompanying mortgage and choose to keep the property tenanted)
  • An asset to pass down to future generations of your family
  • Potential tax advantages, with the Australian Tax Office (ATO) stating that some of the costs of buying and maintaining an investment property can be claimed as tax deductions, called “negative gearing
  • The 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, and are projected to grow further
  • The potential to use your investment property as equity when applying for other loans

Before buying an investment property or taking on an investment home loan, it could be a wise idea to consult a suitably qualified professional.

Potential drawbacks of an investment property

The potential downsides of owning an investment property may include:

  • The possibility that the property may sit vacant for a time, meaning you will need to pay the mortgage on it without the assistance of incoming rent
  • Potential financial risks posed by tenants, who might damage the property, or might cost you money in legal fees if you need to initiate eviction proceedings
  • The cost of maintenance and expenses, which can vary depending on the age and condition of the home, although these costs may be offset by negative gearing
  • Potential capital loss, if the market takes a turn and the value of your property is lower than the balance of your home loan, putting you in a position of negative equity

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If you’re considering purchasing an investment property and wish to compare investment home loans, you can use the tool at the top of this page. Below, you will find a list of additional resources that may be helpful, including a list of tips and guides for property investors, a glossary of common home loan terms, and some further information about the winners of Canstar’s Outstanding Value Home Loan Awards.

This article was reviewed by our Sub-editor Tom Letts and Digital Editor Amanda Horswill before it was published as part of our fact-checking process.

Last updated: 30/07/2021

 


Author: Nina Tovey

As Canstar’s Editor-in-Chief, Nina heads up a team of talented journalists committed to helping empower consumers to take greater control of their finances. Previously Nina founded her own agency where she provided content and communications support to clients around Australia for eight years. She also spent four years as the PR Manager for American Express Australia, and has worked at a Brisbane communications agency where she supported dozens of clients, including Sunsuper and Suncorp.

Nina has ghostwritten dozens of opinion pieces for publications including The Australian and has been interviewed on finance topics by the Herald Sun and the Sydney Morning Herald. When she’s not dreaming up ways to put a fresh spin on finance, she’s taking her own advice by trying to pay her house off as quickly as possible and raising two money-savvy kids.

Nina has a Bachelor of Journalism and a Bachelor of Arts with a double major in English Literature from the University of Queensland. She’s also an experienced presenter, and has hosted numerous events and YouTube series.

You can follow her on Instagram or Twitter, or Canstar on Facebook.

You can also read more about Canstar’s editorial team and our robust fact-checking process.


Follow Canstar on Facebook and Twitter for regular financial updates.


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See Canstar’s Award-winning home loan providers

Canstar’s Outstanding Value Home Loan Awards recognise the lenders that provide exceptional value to borrowers.

The 2021 Award winners for Investment Home Lender were:

  • AMO Group
  • Greater Bank
  • HSBC
  • MOVE Bank
  • People’s Choice Credit Union
  • QBANK
  • RACQ Bank
  • TicToc Home Loans
  • UBank

The 2021 Award Winners for Investment Variable Home Lender were:

  • Athena
  • Credit Union SA
  • Freedom Lend
  • homeloans.com.au
  • Homestar Finance
  • loans.com.au
  • Pacific Mortgage Group
  • Reduce Home Loans
  • TicToc Home Loans

The 2021 Award Winners for Investment Fixed Home Lender were:

  • Greater Bank
  • HSBC
  • MOVE Bank
  • RACQ Bank
  • Teachers Mutual Bank (Firefighters Mutual Bank, Health Professionals Bank and UniBank)
  • TicToc Home Loans
  • UBank

If you wish to know more, you can find out why these institutions were recognised as part of Canstar’s Outstanding Value Home Lender Awards in 2021.

Home loan glossary of terms

Please note that these are a general explanation of the meaning of terms used in relation to home loans or mortgages.

The wording of loan terms and conditions may use different phrases or terms, and you should read the terms and conditions of the relevant loan to understand the features and cost of that loan. You cannot rely on these terms to be part of any loan you may take out.

Refer to the lender’s Key Facts Sheet and other applicable product documentation, and see Canstar’s Financial Services and Credit Guide (FSCG).

Refer to the product disclosure statement (PDS) and Canstar’s Financial Services and Credit Guide (FSCG).

Annual percentage rate (APR): This is the total charge for the loan including fees and interest expressed as a percentage, which allows you to compare across the market.

Comparison rate: An interest rate figure that represents the total annual cost of the loan, including the annual interest rate, monthly repayments, and most ongoing and upfront fees and charges. Under the law and on the Canstar website, all comparison rates for home loans are based on a $150,000 loan over 25 years (read the comparison rate warning). Learn about comparison rates.

Credit rating (credit score): An assessment (typically performed by specialised credit bureaus) of the creditworthiness of individual borrowers, based on their borrowing and repayment history (credit report). Lenders consider your credit rating when deciding whether or not to give you a loan, how much to loan you, and what interest rate you will pay. You can check your credit score for free with Canstar.

Deposit: In the context of home loans, a deposit is a percentage of the purchase price that you will typically need to save and pay upfront. Find out more about home loan deposits and how they work.

Debt-to-income ratio: A comparison that takes in the amount of debt you have relative to your overall income. Lenders will use this calculation as a way to measure your potential eligibility for a loan. Learn about debt-to-income ratio.

First Home Loan Deposit Scheme (FHLDS): The First Home Loan Deposit Scheme is a government initiative designed to help Australians buy their first home.

The scheme is a government guarantee which will secure the mortgages of some low- and middle-income earners with a deposit of as little as 5% of a property’s value, and help them avoid paying expensive Lenders Mortgage Insurance premiums.

Eligible first home buyers could purchase a variety of residential properties under the scheme, including an existing house, townhouse or apartment; a house and land package; land together with a separate contract to build a home; and an off-the-plan apartment or townhouse. However, not all lenders are involved in this scheme.

First Home Owner Grant (FHOG): A government grant given to first home buyers. Learn what first home owner grants are available in your state or territory.

Fixed rate: A fixed rate home loan allows a borrower to lock in an interest rate for a particular period of time, typically from 1 year up to 5 years. The interest rate that the borrower pays will remain the same for that amount of time, regardless of changes in the RBA cash rate.

Guarantor: If someone ‘goes guarantor’ on your loan, it means that they are promising (‘guaranteeing’) that they will be liable for the loan if repayments are not made. The guarantor also means they must be able to demonstrate their own capacity to repay your loan. Learn about guarantors on home loans.

Introductory rate or honeymoon rate: An introductory rate offered to entice borrowers with a low advertised rate for the first few months of the loan. After the honeymoon period, the loan reverts to the standard variable rate offered by the lender.

Lenders mortgage insurance (LMI): Insurance that the loaning institution takes out in case of default from the borrower, which the borrower must pay for. Usually applies to home loans with a higher LVR (more than 80%). Learn about LMI.

LVR (loan to value ratio): This is the maximum proportion of the value of your home that can be loaned out to you. 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. Find out how LVR affects your interest rate and LMI.

Negative equity: Negative equity is when the market value of your property is lower than the balance remaining on your home loan. Find out more about negative equity

Negative gearing: When the income from an investment property is not enough to pay the interest on the home loan for that property, negative gearing is currently available as a tax deduction against that income. Learn about negative gearing.

Offset account: A savings account linked to your loan to offset the interest charged on your loan. The money (or credit) in your account is offset daily against your loan balance, which reduces the daily mortgage interest charges. Learn about offset accounts.

Positive gearing: When you borrow money to invest, and the income you earn from an investment is higher than your ongoing expenses, then the investment is positively geared. Learn about positive gearing.

Pre-approval: An initial approval process where the bank provides a borrower with an estimate of how much they could borrow, based on information they have provided to the bank. Find out how to get home loan pre-approval.

Principal: In the context of a home loan, the principal is the amount of money that you borrow from a lender. It can refer to the initial size of a loan, as well as the amount of money left to pay off on a loan.

Redraw: A home loan feature that enables the borrower to withdraw funds they have already paid. Usually this is conditional on a borrower being far enough ahead on loan payments, and based on the loan they have been approved for. A redraw facility is not available on all loans. Learn about the pros and cons of redraw facilities.

Settlement date: The date on which transfer of ownership officially takes place – the buyer pays the rest of the purchase price, and the final legal documents are exchanged. It is also usually the date on which the buyer receives the keys and assumes possession.

Split loan: A home loan in which a predetermined portion of the loan is locked in at a fixed interest rate and the rest comes with a variable rate of interest. Learn about split loans.

Stamp duty: The state or territory government’s tax calculated on the borrower’s loan amount. Calculate your stamp duty with our calculator.

Variable rate: A home loan interest rate that fluctuates according to the official cash rate set by the Reserve Bank of Australia. The rate can go up or down over time, varying your repayments.