Investment Property Finance

Investment property finance can best be defined as a loan for the purposes of purchasing property that will be used specifically as an investment; ie the property will be rented out and will deliver rental income to the owner as opposed to the property being used by the owner as a primary residence.

A buyer seeking finance for an investment property may require this finance to be structured slightly differently than that for an owner occupied property. There may also be additional considerations if the investment property finance is for the purposes of extending an existing investment portfolio.

Things to consider when seeking investment property finance:

New borrowers

  • allow for higher interest rates of up to 9%, or higher for greater protection
  • percentage points when budgeting for repayments over the next few years
  • maximise your deposit and try to keep your LVR as low as possible, 90 per cent at the most
  • ensure personal debts like credit cards and car loans are under control before committing to a property loan
  • buy for the long term, short-term speculation is more risky now than ever

Existing borrowers

  • make extra repayments where possible to reduce your exposure to higher rates and falling prices
  • Consider switching at least part of your loan to a fixed rate BUT check the flexibility of such loan arrangements.
  • Extra repayments? Early payout penalties?
  • Consider carefully further borrowing against the equity built up in your - can you afford higher repayments if rates are 7 or 8 per cent?
  • Rather than for further spending, use home equity finance to consolidate existing higher-interest debt at the lower home loan rate.

Additional fees


Once you've saved up the deposit for a home, don't forget to take into account all the extra fees that come with buying a house which might include some or all of these:

  • stamp duty
  • legal costs
  • disbursements
  • mortgage insurance
  • pest inspection report
  • survey report
  • builder's report
  • strata inspection report
  • loan application fee
  • valuation fee
  • registration fee
  • sundry fees like refinancing or switching fees.

On a mortgage loan of $300,000 you can expect to pay at least $15,000 in fees. With mortgage insurance, this will rise to about $17,470.

Be careful of 'honeymoon' intro rates

Home lenders entice borrowers to their home loans with attractive low introductory rates. These rates may be up to 2 percentage points below the standard rates for home loans and therefore look very attractive. But these "honeymoon rates" only last for six months to a year before automatically reverting to the standard rate offered by that lender.

By all means take advantage of these discounted rates but don't let them dictate your choice of loan. It is far more important to compare loans by flexibility of features and the standard rate that you will face for years into the future. The 'comparison rate' that lenders must publish for each loan is a much better tool with which to compare the true interest and fees costs of different loans.

Choosing the right home loan


There are no right or wrong answers when it comes to choosing a home loan - it just has to be right for you. But you must know what all the options are before making a decision. A basic fact to keep in mind is that the more flexible the loan, the higher interest you'll pay. A variable loan which allows you to draw against repayments or offset savings against the mortgage will have a higher rate than a basic loan.

Look beyond the banks


Get a feel for what's on offer across the wide range of financial providers around these days. Credit unions, building societies, mortgage originators, community banks and boutique online or telephone banks may offer better interest rates or lower fees than the big banks because they are anxious to win new business or they are non-profit organisations.
Consider whether you need a redraw facility
A redraw facility allows you to make additional repayments on your mortgage, and then have access to the additional repayments if you need to.

However, the facility is normally only available on "Standard Variable" loans, which are more expensive than basic variable loans. Before you choose the more expensive loan, make sure you understand the conditions attached to the redraw facility as it may include a minimum amount and a fee every time you use it.