Are you thinking about the finance you might need for your property investment goals for this year?

Whether you’re just starting out or growing an existing portfolio, considering potential lending options might be part of your property investment strategy.

Here’s a general overview of the key aspects to keep in mind when it comes to home loans for investors.

What are your options?

Property investors have several options when it comes to structuring their borrowing.

You’ll typically need to decide whether you want a fixed rate, or one that’s floating.

Much of this decision will come down to your own individual circumstances, cashflow, and your ability to cope with potential interest rate movements in future. Longer fixed rate terms offer more certainty, but a series of short-term fixes can sometimes offer lower rates and a lower interest cost.

Interest rates can move quite quickly, and many borrowers prefer to choose a rate that works for their budgets and objectives, rather than trying to time the market to pick the bottom of the interest rate cycle.

Floating rates can be suitable if you plan to make lump sum payments or need more flexibility. However, floating home loan interest rates tend to be higher than those available on fixed terms.

Another factor to consider is whether you want a loan that involves paying off both the principal and interest, or one that just pays off the interest.

Investors’ interest costs are deductible again, at a rate of 80 percent of interest costs on investment properties until 1 April 2025, and 100 percent thereafter. This generally means you can claim them against your rental income for tax purposes.

Some investors like interest-only loans because the repayments are generally a bit smaller. That can allow them to put any money not required for loan repayments towards other investments or expenses. But the saving is not always large, and many lenders have limits on how long you can have an interest-only loan for.

Your SHARE or Newpark Home Loans mortgage adviser can help you work through the options, and find what might be a good fit for you.

What’s different about a property investment loan?

The main difference between a loan for an owner-occupier and an investor is the deposit required.

Loan-to-value restrictions require banks to limit their lending to investors with deposits of 30 percent. This means you’ll generally need at least a 30 percent deposit or 30 percent equity to qualify for a loan.

Using equity

Often, property investors build their portfolio by using the equity in their other properties.

For example, if you purchased a home for $500,000 with a $400,000 mortgage and over time paid $50,000 off the loan, while the property’s value increased to $700,000, the total equity in the property would be $350,000.

If your lender allows borrowing up to 80 percent of your owner-occupied home’s current value, that will mean (in this scenario) you could potentially access $560,000. After accounting for your remaining loan balance of $350,000, this would leave $210,000 available for potential use, such as a deposit for another property. In this scenario, $210,000 could contribute to purchasing an investment property valued at around $700,000 with a 70% LVR, although this is subject to also meeting all other lending criteria.  

New rules and lending limits

New debt-to-income ratios limit how much people can borrow in relation to their household income. For investors, banks will be limited to only offering 20 percent of their new lending to borrowers who borrow more than seven times their gross household income.

This calculation includes all existing debts, including the mortgage on your own home and any other debt such as student loans.

What about non-bank lenders?

You aren’t limited to getting finance from the main banks. Non-bank lenders also work with property investors and can be an option for people who do not quite fit into the bank’s lending boxes.

Have a plan

It’s important to have a clear plan for your borrowing as a property investor. You’ll need to have a good overview of your expenses and cashflows, and how any future movements in interest rates could affect you.

Your SHARE or Newpark Home Loans mortgage adviser can help you monitor your current borrowing situation, as well as honing your finance strategy for the future. It is also often an excellent idea to seek investment advice alongside this.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.