Choosing the best investment property loan

Choosing the right investment loan type for your Australian residential or commercial property investment is an important decision and can have very positive effects on your cash flow if done correctly. Here are some pointers to get you started.

Interest Only or Interest+Principal?
Interest-only is recommended since it will free up your cash flow. Banks will typically allow up you to establish investment loans with interest-only payments for up to 15 years.

Fixed or Variable?
Interest expenses make up the bulk of costs involved with investing in properties. Consequently, you want to aim to minimise rates where possible. Variable rates are best when you expect official rates to stay on hold or start to fall. Fixed rates are usually best where you expect an increase in official rates in the near term or where you want to lock in interest rates to manage cash flow risk.

Be sure to factor-in the possibility of an interest rate rise into your cash flow and affordability calculations.

One other thing to remember is that if you lock in for a fixed rate then it is much more difficult to move that loan to another lender mid-term. So variable rates are often better if you are planning on shopping around and need the flexibility to move in the near future.

How much can I borrow?
If you already have equity in your own home or in other investment properties, Australian banks will lend you up to 100% of the purchase price + purchase costs provided your total loan to value ratio (LVR) does not exceed 80% (for residential) or 70% (for commercial). Some examples of residential property borrowing potential:
Current
Home Value
Home Loan
Remaining
Current
LVR
Borrowing
Potential
$1,000,000 $500,00050%$1,500,000
$600,000$350,00058%$650,000
$800,000$400,00050%$1,200,000
$500,000$200,00040%$1,000,000
$500,000$300,00060%$500,000
$400,000$250,00063%$350,000

If you don’t have your own home as equity and are just getting started then you will need to provide a deposit. This can vary from 20% to 5% (with mortgage insurance/LMI).

The banks will also look at your ability to service the loans by looking at your income and expenses. Fortunately, they will take into account the expected rental income for the new property in their calculations.

Most banks have borrowing capacity calculators which will give you a good indication of your borrowing potential.

Setting up your loans
Banks will set up your loan accounts as individual accounts. It is best to have a single cheque/savings account set up to receive your rental payments and then have the loan payments automatically come out of this account. You can set this account up as an offset account to other loans, including your home loan, so that cash balances can help offset the interest on your home loan – be sure to check this with your tax adviser.

Most importantly, be sure to pay off your own home loan as quickly as possible – your interest expenses on your own home are not tax deductible so it is best to retire these as soon as you can.

Getting the best deal
As your property portfolio grows, the banks will start to love you more and more. Be sure to ask your bank for a “better deal” on interest rates when you apply for more loans with them. Mention that you would hate to shop around for a better deal (since other banks would certainly like to acquire your business). If your bank won’t play ball then be sure to go shopping for a better deal – you will certainly find it.

The information provided is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. You should consider whether the information is appropriate to your needs and seek professional advice from a financial adviser before making any investment decisions.