Features to look for in an investment loan
Any investor will know that finding a mortgage with a low interest rate is important. But a savvy investor will take things a step further by hunting down an investment loan that not only has a great rate but competitive features too.
In this guide we’ll reveal why features like interest only repayments and an offset account can come in handy for property investors.
1. Interest only repayments
With a standard home loan you will repay both the principal and the interest. But what many thrifty investors do is opt for interest only repayments for an introductory period. There are several reasons to go down this path:
If you decide to only repay the interest, your repayments will be significantly lower than if you were repaying both the principal and the interest, freeing up cash for other investment pursuits.
Example: Christina is buying her first investment property and is on a tight budget. She is looking to borrow $500,000 and repay the loan over a 30 year period. Our home loan repayments calculator shows if Christina takes out a mortgage with a 5% interest rate and pays back both the principal and interest her repayments will be $2,684 a month. But if she opts for the interest only option, her ongoing repayments will drop down to $2,083. Meaning Christina will pay $601 less each month by going for the interest only option.
Interest is tax deductible
To top things off, according to the Australian Government’s website if you are purchasing the investment property as a rental property (e.g not for private use), you can claim the interest charged on the loan.
Example: Say Christina rents out her investment property and receives $20,000 in rent over a 12 month period. Because those monthly $2,083 interest repayments add up to $24,996 over a year, this will mean her property is negatively geared and she will be able to claim $4,996 come tax time.
Quick note: You might be thinking that by only paying the interest you aren’t paying off the loan balance and you’re right. That’s why interest only repayments don’t last forever, they are usually set for a term of between 1 and 5 years. After which you’ll have to start paying down the loan. However, some lenders are flexible and may extend your interest only repayment period.
2. Offset account
Another top feature that is popular with investors is an offset account, which you can use to replace your everyday bank account and comes with a debit card for your regular purchases. An offset facility is usually used as an alternative to having an extra repayments and redraw facility with the aim of bringing down the interest you pay.
Let’s draw some parallels between the two. With an extra repayments facility you can make additional payments on your loan thus paying down the principal of the loan, meaning you’ll pay less in interest. The redraw facility then allows you to draw upon those extra repayments when you please.
Whereas with an offset account any money in the account is offset daily against your home loan principal, also meaning you’ll pay less in interest. For instance, with Christina’s example if she puts $20,000 in an offset account rather than being charged interest on the entire $500,000 amount owed, she’ll only be charged interest on $480,000.
The reason an offset account is a great choice for investors is because you can use it as a place to stash your cash while you save for your next investment property, whilst bringing down the interest you pay on your current loan. Then when you find your next investment property it’s easy to access that cash to pay the deposit without incurring redraw fees.
We should mention though, that 100% offset facilities are only available with variable rate loans. If you want some protection against a rate rise but also want the flexible feature of a partial offset account you could go for a split rate home loan, which means a portion of your loan will be left variable while the remainder is left fixed.
3. Line of credit facility
Do you think you might be renovating the property you’re purchasing? Then you could look for a home loan that comes with a revolving line of credit, which works just like an overdraft account allowing you to draw upon cash up to a set limit when needed.
This means you only pay interest on what you use. But keep in mind generally lenders charge higher interest rates for loans with a line of credit facility.
4. Repayment holiday
As an investor it’s likely you’re relying on your rental income to cover the majority of your home loan repayments but what happens if you can’t find a tenant to rent your property for a period?
An option could be going for an investment loan that comes with the flexible feature of a repayment holiday, which as the name suggests allows you to have a break for an agreed period of time from making your repayments. But generally this option is only available to borrowers who are ahead on their repayments.
5. Your choice of repayment frequency
Last but not least, make sure you look for a mortgage that allows you to choose your repayment cycle. Often standard home loans only allow you to repay your mortgage monthly but if your tenant pays their rent on a weekly or fortnightly basis, you’ll want to be able to set up your repayments to match. So make sure you put a loan with repayment flexibility on your investment loan shopping list.
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