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Investment loans – Game the market and build your income
When you borrow to invest in the property market, the end goal typically involves using the lender’s low-interest funds for wealth creation. It’s a long-term plan that relies on rental income to cover mortgage payments and other ownership costs.
Once you clear your debt, you’ll have a bigger and steady stream of income to pocket. At the same time, your brick and mortar investment will hopefully keep increasing in value. If you’re interested in rolling out this strategy, use our guide below to learn more about investment loans in Australia.
What are investment loans, and how do they work?
An investment loan is built like a home loan in most ways. For instance, you borrow money to top up a deposit, so you can purchase a property you usually couldn’t afford. You then repay what you owe (inclusive of interest and other fees) in regular instalments over a fixed period.
The crucial difference is that rather than the usual owner-occupier arrangement, you’ll be opting for a buy-to-let deal that delivers a steady source of rental income into your lap. Other features that come with this type of home loan include:
Low loan to value ratio (LVR). The loan to value ratio is the value of what you can borrow relative to your property’s value. Australian lenders generally require investors to have a loan to value ratio of 80% or below. That means you’ll need to put up a deposit of at least 20%.
Higher interest rates. Investment loan rates tend to be higher since there’s more risk involved for the lender. That’s because the property is your source of income, and profit is not always guaranteed.
Tax benefits. Investment loans allow you to make tax deductions. This goes a long way towards reducing your taxable rental income and other costs such as repair, maintenance and council rates. Types of interest rates for investment home loans
Investment home loan rates can be split into three different types:
Fixed interest rates. A fixed rate locks your repayments in place for the entire life of the loan. These often have higher starting rates than variable rates, but they offer protection from increases.
Variable interest rates. A variable rate peaks and falls broadly in line with the Reserve Bank of Australia cash rate. That means your repayments may change, and you save if the rate goes down.
Split interest rates. You can also forego the debate between choosing a fixed or variable rate by opting for a split rate. Your loan term will then be divided into fixed rate and variable rate portions. Types of repayment plans for investment home loans
Besides choosing a fixed rate, a variable rate or a mix, you’ll also have to weigh up your choice of repayments:
Interest-only. An interest-only investment loan addresses your debt’s interest while ignoring the principal (the actual amount borrowed). Therefore, repayments are smaller though normal repayments usually kick back in after the interest-only period expires.
Principal and interest. With this option, you wear away your debt on both ends. This also allows you to build equity, and in some cases, lenders will let you use it as a line of credit where you borrow and repay money as per your needs. What about other types of investment loans?
Besides investment property loans, you’ll also find margin loans where the borrowed funds go to purchase shares, managed funds or other securities. Your existing investments usually act as collateral for the debt.
Like investment home loans, you’ll need a larger deposit because of the low loan to value ratio. Margin loans also come with tax benefits. Overall, they are a great way to diversify your portfolio and create profitable investment returns.
How to apply for an investment loan with a low interest rate
To qualify for a low rate, you’ll need to put in some work to get a more positive risk assessment from the lender. Here’s how to beef up your borrowing profile and bag the best deal available:
Pay a larger deposit. Having more cash set aside means you borrow less, which generally nets you a lower rate.
Check your credit score. If your credit profile has several glitches, your application might be affected. It usually pays to sort these out before applying.
Compare investment loans. When shopping around, there are several things you need to hold up to the light. These include interest rates, comparison rates, fees and charges, and other beneficial features like offset accounts. You can also use our investment loan calculator to make comparisons and find suitable repayments. Next, check lending criteria to ensure the best option for your needs is one you qualify for.
Seek professional advice. Using a mortgage broker might help grease the wheels of your application process. Brokers can easily spot better deals and may have insider tips on negotiating for a lower rate.
Prepare your documents. Taking the time to shuffle all the necessary paperwork together might make all the difference between a stronger application and a weak one. Popular personal loans searches
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