A good investment loan can make the process of purchasing a property for investment purposes straightforward and easy to manage during the life of your investment. Investment loans can vary in complexity and what you choose will depend on what you are trying to achieve. Mortgage brokers can help set you up with the right investment loan but like any service provider, make sure you know what payments they will be receiving for the provision of their services.
- What do I need to consider when looking for an investment loan?
- What are the different types of investment loans?
The loan structure and features that you choose can affect your ability to succesfully manage your investment, build equity over time or deal with time without tenants. You should keep in mind the following when choosing an investment loan:
- what features do you need?
- can you get an interest only loan?
- should you or can you fix your loan rate?
- how much are you eligible to borrow?
- how much can you afford to borrow?
- how much can you afford to repay?
- do you understand how to use the loan to ensure you maintin elegibility for tax deductions?
Let's take a look at a few of the more common types of investment loans:
Principal and interest - the simplest of loans and usually used by owner occupiers who are paying the loan with the intention of eventually owning the property. Every regular payment pays off interest and a proportion of the principal borrowed.
Interest only - usually the preference of loan types for investors who only want to pay off the interest which is generally tax deductible (principal repayments are not deductible). You can usually request an interest only period from 1 to 5 years and often banks will allow this period to be renegotiated.
Line of Credit - you can access the equity in a property by securing a line of credit against that property. A Line of credit loan can be drawn upon, paid down and redrawn numerous times for different purposes. Keeping track of the purpose of the loan drawings is important for investors when taking into account the tax deductibility of interest repayments but they are useful if the loan is not fully drawn down so that there is a buffer available to cover any shortfalls in rental payments over the term of the investment. They are also useful to have pre-approved so that you have the funds available to purchase your next property investment.
Other Options - other types of loans can include loans with redraw facilities (note that you should only use redrawn funds for investment purposes), loans with a 100% offset account attached (useful to save paying tax on savings while at the same time reducing interest paid on the loan), split loans (useful if you want to take advantage of low interest rates to fix while at the same time having the flexibility to redraw or offset on the variable component).