The short version
- Investment loans usually cost a little more than loans for a home you live in.
- Lenders count only part of the rent as income, and test you at higher rates.
- Interest is usually tax deductible, so talk to an accountant.
What an investment loan is for
An investment loan helps you buy a property you don't plan to live in, usually to rent it out for income, to sell later for a capital gain, or both.
Stricter conditions
Investor rates are usually higher than rates for a home you live in, and some lenders ask for a bigger deposit. Lenders want to see that you could keep up repayments if rates rose, so they test your budget at a higher rate.
They count part of the expected rent as income, but usually not all of it, to allow for empty weeks and costs. A clean credit report and steady income help.
Rate types
Investors can usually choose from the same rate types as owner occupiers:
- Fixed, often for 1 to 5 years before it reverts to variable.
- Variable, often with extra repayments, redraw and an offset account.
- Split, with part of the loan fixed and the rest variable.
- Interest only, which keeps repayments low while you hold the property. Your balance doesn't fall, so if prices drop you could owe more than the property is worth.
Fees to budget for
Depending on the lender and your deposit, you may pay:
- An application or establishment fee.
- Lenders mortgage insurance if your deposit is under 20%.
- Monthly or yearly account fees.
- A break fee if you pay off a fixed loan early.
- A discharge fee when the loan is paid off or you refinance.
Negative and positive gearing
If the rent is more than the costs of owning the property, including interest, the property is positively geared and you pay tax on the profit. If the costs are more than the rent, it's negatively geared, and you may be able to take the loss off your other income to reduce your tax.
Many investors accept a loss each year in the hope the property rises in value. Talk to an accountant or tax agent before you rely on gearing, and remember you'll usually pay capital gains tax when you sell.
Pros
- Rent helps cover the repayments.
- Interest and many costs can be tax deductible.
- Property can grow in value over time, though it can also fall.
Cons
- Higher rates than for owner occupiers.
- Stricter lending and sometimes bigger deposits.
- Empty weeks, repairs and rate rises can leave you out of pocket.
What to compare
Start with the rate for your situation: the rate a lender offers depends on whether you'll live in the home or rent it out, how you repay, and the size of your deposit. The comparison above picks each lender's rate for your choices.
Then look past the rate.
- Fees: upfront fees, and annual package fees that often come with an offset account.
- Features: an offset account, redraw, extra repayments and the option to split the loan between fixed and variable.
- The comparison rate, which adds standard fees to the rate for an example loan of $150,000 over 25 years.
- Any cashback, but only after the rate and fees, since a higher rate can cost far more over the life of the loan.
Lenders mortgage insurance
With less than a 20% deposit, most lenders charge lenders mortgage insurance (LMI). It protects the lender, not you, if you can't repay, and can cost thousands of dollars, either upfront or added to the loan. The cost depends on the property's value, the loan amount, the size of your deposit, and the lender's insurer.
LMI doesn't get you off the hook: if the home is sold for less than you owe, the insurer can still pursue you for the shortfall. You may avoid it with a guarantor, through a government scheme, or with a lender's waiver for some professions, such as doctors, lawyers and accountants. A mortgage broker can tell you which lenders take small deposits and how their LMI costs compare.
Alternatives
- Shares or managed funds, which you can buy in small amounts and sell quickly.
- Paying down your own home loan first, a guaranteed return equal to your rate.
- Buying where you rent, then renting where you live, sometimes called rentvesting.
How to apply
Most people get pre-approval for an investment loan before they start making offers, then the full approval once they've found a home.
- Get your documents together. Payslips, two years of tax returns if you're self-employed, bank statements showing your savings, and details of your debts and credit limits.
- Get pre-approval. It tells you how much you can borrow and shows sellers you're serious. It usually lasts three to six months.
- Find the home and sign the contract. The lender then values the property before it gives full approval.
- Settle. Your lender pays the seller, and your repayments start about a month later.
- Have the expected rent ready. Lenders want a rental appraisal from an agent, or the current lease.