Three things you need to know about investment loans

Planning to invest in property? Here are three things you need to know before you start talking to lenders or brokers about an investment loan.

1. Strategy is king

There are lots of ways to make money out of an investment property and with the right strategy it can be a good way to grow your wealth. But any investment has its risks and some strategies, such as negative gearing, may carry risks that are not prudent in certain circumstances.

The right choice of investment loan will depend on your strategy, so the very best thing you can do before you start mortgage shopping is to collect all relevant financial information for your circumstances.

2. There may be a shortcut (at a price)

If your home is worth more than you owe on it, you may be able to borrow against that surplus with a line of credit or equity loan.

This can offer a shortcut to buying an investment property, giving you quick access to cash so you don’t have to wait until you’ve saved enough for a deposit.

But there’s a cost. Fees and interest rates on equity loans may be higher than on mortgages for your home. If you can’t repay the loan, you may end up with a bigger mortgage on your home.

3. You’ll have important choices to make

If you’re new to mortgages, the variety of options and features can seem confusing. Here’s a quick guide to the basics:

Fixed/variable/combination loans

These refer to how the interest is calculated on your loan. With fixed rate loans, you’ll pay an agreed rate each month for a set period, after which the interest may switch to a variable rate.

With a variable rate loan your repayments will go up and down with the interest rate changes. Interest rates vary due to changes in the rate set by the Reserve Bank of Australia or through other circumstances.

Fixed loans may give certainty and protection against interest rate rises but they also may cost more and offer less flexibility for early repayments. And if interest rates go down, you still have to pay the previously agreed amount.

With a combination mortgage, the interest can be fixed on a part of the loan and variable on the rest, giving you the advantages – and disadvantages – of both.

Principal/interest-only

Interest-only loans can offer a lower-cost way to invest in property – but they come at a cost. Unless property prices rise, or you add value through renovations, you can end up paying interest for some time without building equity.

Offset/redraw

These are common features available on some variable loans that let you reduce your interest payments, but still have access to cash if you need it. The credit balance of your linked account is offset against your outstanding loan balance, reducing the interest payable on that loan.

If you make any extra payments on your mortgage, a redraw facility lets you borrow back these funds if you need them. However, the amount you redraw will be added back to your mortgage balance and you will pay interest on the higher balance.

At Loan Market we can assist you by providing all the information available to help you choose the right investment loan.

Call us today and take the first step towards owning your investment property.