Investment property loans allow Australians a fast track to passive income. They’re a bit complicated, though, so in this FAQs page we’ve tried to clear up a few of the most commonly-expressed questions about investment property loan acquisition.
What is an investment property loan and how does it work?
An investment property loan is money borrowed for the purpose of buying residential or commercial property to rent out. By investing in property investors are hoping to receive a steady rental income to help repay the investment loan and long term capital growth on the value of the property.
For example, let’s say you borrow money to buy a rental property. It generates $100,000 per year in rental fees, and you have to pay $90,000 a year in loan repayments, interest, property taxes, and property outgoings. That means you pocket $10,000 per year and own a property that will pay for itself in time!
How do investment property loans differ from traditional home loans?
The main difference between the two is the purpose of the property being bought. A home loan is meant to be used for the purchase of an owner-occupied property, whereas an investment property loan is meant to buy a property that will be rented out or will make income in some other way.
What are the requirements for qualifying for an investment property loan?
Investment property lenders generally require:
- 5-10% of the property value paid as a deposit. This is much higher than the 3-5% required for a home loan.
- Proof that you’re an Australian citizen or permanent resident.
- Proof of employment and income.
Of course, requirements for your investment property loan may vary significantly based on how much you want to borrow.
How can I improve my chances of getting approved for an investment property loan?
A few of the best steps to take are:
- Repay existing debts – Lenders look at your existing loan commitments, so closing credit cards that are not being used or repaying or consolidating existing personal loans will help.
- Prepare DETAILED financials – It’s important that you present extremely thorough, well-compiled documentation. Ensure you have up to date well documented payslips or if self employed recent completed tax returns and financials.
- Raise your credit score – Of course, there are lots of ways to raise your credit score over a long period. To raise it in the short-term, though, look into measures like removing paid debts from your credit report and increasing your credit limit.
- Work with an experienced intermediary – Borrowers going through brokers like K Partners are often more likely to be approved for a loan since the lenders can be confident they are receiving the proper advice.
What types of properties can be financed with an investment property loan?
An investment property loan may be given for any property that is bought with the primary purpose of renting out. Additionally, the investment property cannot be a primary residence for the borrower.
The two most common types of properties are:
- Residential property. This includes stand alone houses, townhouses, units and apartments. Generally residential properties will be rented out tenants looking for a home to rent.
- Commercial property. This includes shops, factories, offices, medical clinic and other types of business property.
What are the typical interest rates for investment property loans?
Interest rates for investment property loans in Australia are currently around 6.55%, although they can be as low as 6.15% or as high as 7%. The exact figure depends on how much you are looking to borrow and the type of property you are looking at buying.
How much of a deposit is required for an investment property loan?
The deposit for investment property loans are almost always higher than those for home loans since they tend to be a bit riskier for the lender. Expect to pay a deposit of between 5-10% of the value of the property for a residential property , and 20-30% of the value of the property for commercial property.
What are the repayment terms for investment property loans?
Most investment property loans have a term of 30 years, though the borrower can usually request a shorter term to get a better interest rate.
Lenders usually offer “interest-only loans” as well as the normal P&I (principal and interest) loans. With an interest-only loan, the borrower does not need to pay off any of the principal and only has to pay the interest cost for the loan over a set period – usually, 5 years. After that interest-only period expires, the borrower will have to start making principal and interest loan repayments.
Are there any tax benefits associated with investment property loans?
Yes, Australia offers lots of tax benefits to investment property loan holders, such as:
- Tax-deductible interest – You can claim the interest paid on your investment property loan as a tax deduction.
- Tax-deductible losses – It is obviously the goal to make a profit on an investment property you are renting out. If you end up taking a loss, though, you can claim that loss as a tax deduction.
- Reduction in capital gains tax – When you sell your investment property for more than you bought it for, the profit you made is eligible for a 50% reduction in capital gains tax as long as you’ve owned the property for at least a year.
- Tax-deductible maintenance and repair costs – Necessary maintenance for issues that arise after you buy the investment property are tax-deductible.
Can I buy an investment property with a home equity loan?
Yes, you can do whatever you want with the money you get from a home equity loan as long as you abide by what you told the lenders when taking the loan. Most home equity lenders are happy to fund the purchase of an investment property as long as you demonstrate you’ll be able to maintain your payment schedule.
What are the risks involved in taking out an investment property loan?
Interest rates can change and this can substantially increase the loan repayments and impact your personal cashflow. As you are using the funds to buy a property with the view to receive regular income and make a capital growth, there is a risk of having a period of non tenancy and no rental income being received.
To mitigate the risks, you have to ensure that you are in a strong financial position with appropriate cash buffers to get you through periods of non tenancy or high interest rates.
How many investment property loans can I have at once?
There is technically no limit to how many investment property loans you can have at any point in time. Whether or not to give you more loans is at the discretion of the lenders, though. They are unlikely to do so unless you demonstrate you’re well on your way to repaying your existing loans.For advice on investment property loans, contact K Partners to schedule your free, no-hassle consultation.
See more: Buying Property with Superannuation: Pros and Cons