Best Refinance Rates for Investment Property

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What are investment home loans?

An investment home loan is the type of mortgage property investors use to buy investment properties. Investment loans look the same as owner-occupier home loans (which is the mortgage you get to buy your own home), but they typically have higher interest rates. This is because lenders view investors as riskier borrowers.

While every borrower benefits from finding a loan with a lower interest rate, an investor may have different priorities to an ordinary home buyer. An investor’s mortgage interest charges are tax deductible (it’s a business expense), and so are the loan fees.

Different types of investment loan

As with other loans, an investment home loan can have:

A fixed or variable interest rate.Variable rate loans are more flexible (easier to pay off faster or refinance without an exit fee) and are currently lower than fixed rates loans. But a fixed rate loan lets you lock in an interest rate and forget about rates rising. There’s also the option of splitting your loan into fixed and variable portions.
Principal-and-interest repayments or interest-only repayments.
With a principal-and-interest repayments you pay off the money you’ve borrowed plus interest on top. That’s what most borrowers do. But interest-only loans are popular with many investors. These loans start with very low repayments because you’re not paying off the loan. You just pay the interest on top. These loans cost you more in the long run. But for investors they are a way to maximise your tax deductible debt in the short term.

Market update: What is the average investment loan interest rate in June 2022?

Examining all the investment loans in Finder’s database this month, we can see that:

The average variable investment loan rate is 3.94%.
The lowest variable rate on the market is 2.39%.
The lowest in the database is a 1-year fixed rate of 2.69%.
The average across all fixed investment rates is 4.75%.

Australian property investors took out a record $11.9 billion in investment loans in March, according to the latest ABS data. There was also a record number of investment loans issued. This data might seem surprising given the negative outlook for Australian property markets: House prices have started to fall nationally. Interest rates are rising fast off the back of 75 percentage point increases to the official cash rate in the last 2 months.

But the investor lending data comes to us later than interest rates changes (which happen in real time) and price data (CoreLogic puts out monthly home values for the previous month at the start of the current month). Lending data is a few months’ behind.

Read: Cnbc Investing Club Vs Action Alerts Plus

Updated on 08 June 2022 by Finder’s home loans editor Richard Whitten.

How do I compare investment loans?

Property investors should consider the following when finding the ideal mortgage:

Interest rate.
For any borrower, a lower interest rate means lower repayments, which makes your investment property less expensive. But interest on investment loans is a tax-deductible investment expense, so getting the absolute lowest rate is less important than getting the right loan to suit your investment purpose.
Fees and charges.
Avoiding fees where possible can also help make your loan cheaper, but again, mortgage fees for investors are generally tax-deductible.
Loan features.
Mortgage features like an offset account can be very helpful, not to mention financially rewarding, if you know how to take advantage of them. It all depends on your investment strategy.
LVR.
Loan to value ratio (LVR) is the amount you can borrow relative to the value of your investment property. An 80% maximum LVR means you need a 20% deposit. The smaller your deposit, the more you have to borrow, and the higher your costs will be.
Borrowing capacity.
Every lender will offer you a different amount of money, depending on their own policies, criteria and risk profile. Some may lend a lot more (or a lot less) than others. It’s worth looking at multiple lenders to get an estimate of your borrowing power before deciding on one particular loan or lender.

Investment strategies and tips

While investing is always a risk, Australian property investors have some big advantages. For one thing, your investment expenses are tax deductible. Negative gearing means you can cut your tax bill if the investment loses you money in the short term.

But a bit of expert knowledge can help you make better investment decisions.

The biggest mistakes property investors make when it comes to financing their purchase

Property investor Michael Yardney.

Michael Yardney is the founder and CEO of Metropole Property Strategists and a veteran property investor.

Property investment is a game of finance with some houses thrown in the middle

“Beginning investors think they can just go to any bank, get the lowest loan rate and they will be set. On the other hand, strategic investors don’t use finance to buy properties, they set up their finance to buy the time to ride the ups and downs of the property cycle so their investment properties can increase in value and give them the equity and cash flow to buy further properties.

“They do this by setting up cash flow buffers in facilities such as offset accounts so that they have the ability to pay for unexpected expenses or manage cash flow shortages.”

Focus on the long term

“This year the performance of our share market and the property markets, as well as the numerous pessimistic property predictions by the so called ‘experts’, reminded us that we should not make 30-year investment decisions based on the last 30 minutes of news.

Read: Cash Out Mortgage on Investment Property

“Strategic investors have a long-term focus and don’t change their plans based on what’s happening now.”

How property type can impact your home loan approval

Profile photo of property and investment expert Cate Bakos.

Cate Bakos is a buyer’s advocate, property expert and President of the Real Estate Buyers Agents’ Association.

“Assuming a lender will accept every property is a mistake,” buyer’s advocate and property investment adviser Cate Bakos tells Finder. “I’ve seen investors purchase properties with limited kitchen facilities in place only to be shocked when the property is rejected altogether by the lender.

“Buyers also need to be confident that they aren’t paying too much. Conducting recent comparable sales analysis and focusing on recently sold properties on similar land size, with similar layout, style and age in a similarly regarded street is crucial. If they can’t identify properties to support the price they are prepared to pay, they need to anticipate that the lender’s valuer may not be able to justify it either.”

How do I apply for an investment home loan?

Lenders treat investment properties as higher risk purchases, which means it can be more complicated to get an investment loan approved than it may be for an owner-occupier loan.

Here are some tips for a successful investor loan application:

Check your credit score.
A quick check of your credit score is a good idea to make sure you don’t have any debts or credit problems that could harm your application.
Save a bigger deposit.
Having at least a 20% deposit is an advantage when applying as an investor, as it means you don’t have to seek approval of a lender’s mortgage insurer.
Get all your paperwork together.
Having a strong application supported by financial documentation is a must.
Trim your spending.
Lenders examine an applicant’s spending very carefully. Cutting back on unnecessary purchases in the 3 months leading up to your application may boost your chances of approval.
Choose your property carefully.
Lenders use your property as security. If the property you’re buying looks like a riskier investment due to its size, property type or location, the lender might reject your application. Buying a small unit in a postcode where there is an oversupply of such properties could be a red flag, for example. Talk to the lender before applying.
Talk to a mortgage broker.
A qualified broker can help match you up with a bank or lender whose policies and criteria best suit your personal situation. They can help with the paperwork too.

Organise a free chat with a mortgage broker today

Are you ready to be an investor?

Property investment can be both risky and rewarding. Rental income and capital gains are never guaranteed. Before taking the plunge, here are some of the potential risks and benefits you should think about.

Benefits

Rental income.
You may earn a rental income that puts cash in your pocket right away; some investors may enjoy returns of $50, $100 or more every week, over and above the costs of owning the property. You can invest this money into the mortgage to pay the loan off sooner, or use these funds to supplement your own income.
Capital gain.
Many investors buy property with an eye on the long-term gains, so they’re aiming for future price appreciation. When it comes time to sell your property, you may benefit from making a capital gain if the value of your property has risen. You could potentially grow wealth far more effectively with property than through savings alone.
Tax and depreciation benefits.
You can deduct investment loan interest charges and other investment costs from your income tax each month, making the cost of owning a property far more affordable.
The potential to add value.
Unlike shares or other investments, you may be able to manufacture equity or price appreciation in your property asset by adding value through renovations.

Read: Is Fisher Wallace a Good Investment

Risks

Costs.
There are also many up-front costs for investors, including lenders mortgage insurance (LMI), stamp duty, building and pest inspections, conveyancing and legal charges. This is all on top of the deposit.
Ongoing maintenance.
As the owner of the property, you’ll be responsible for covering ongoing costs such as repairs and maintenance. Strata fees and council rates will be payable too.
Managing tenants.
Being a landlord means dealing with the tenants in the property. You can do it yourself or outsource this work to a property manager, who will charge a percentage of the rent as commission.
Selling can take time.
Depending on the location and type of property, selling can take some time, which is why property is not considered a very liquid asset. If you need to sell to access your investment funds on short notice, property might not be the ideal investment vehicle for you.

Find the right home loan now