What is an investment loan?
An investment loan is a type of home loan that someone takes out to buy an investment property. It is a mortgage designed for those who want to buy a property and rent it out to receive income from it, but can’t afford to buy the property without a loan.
How does an investment loan work?
Investment loans generally work on a similar premise to all other home loans – when buying a property, you pay a deposit and the bank then lends you the rest of the money you need. You must then pay back that loan – plus interest charged by the lender – in regular installments, for the term of the loan.
Where investment loans typically differ from other types of home loans is in some of their approval conditions and features. For example, investment loans often require a lower loan-to-valuation ratio (LVR), meaning investors may need to raise a larger deposit before applying for a loan. They also have a slightly higher interest rate on average than residential home loans do, according to a recent rate analysis of Trucapital’s database of more than 4,000 home loan products (June, 2020).
What are the pros and cons of owning an investment property?
There can be many benefits and challenges involved in owning an investment property. Before making any financial decision, it could be a wise idea to do your research and obtain independent financial advice. If you’re thinking of purchasing a particular property, you may also want to talk to a qualified solicitor or licensed conveyancer in your area to receive further advice tailored to your situation.
While individual circumstances will differ, some potential benefits of owning an investment property could include:
A source of income
Provided you pay the accompanying mortgage off, investment properties can provide a long-term income stream that typically increases over time, in the form of the rent tenants pay to live there. However, there are also expenses that have to be taken into account when considering the financial rewards of this type of investment, such as maintenance costs and council rates.
Growth in property value over time
Australian house prices have generally grown over time, when looking at long-range figures. So, generally speaking, it could be said that the value of property investments have increased over the long term, too. However, in recent years many parts of Australia have also seen reductions in price growth, and the current predictions for housing price growth in the near future has not been as positive, due to the COVID-19 pandemic.
Potential tax advantages
The Australian Taxation Office (ATO) states that some of the costs of buying and maintaining an investment property can be claimed as tax deductions to reduce your taxable rental income generated by the property, as well as to potentially lower the capital gains tax you typically need to pay upon selling the property. The ATO states that the tax deductions you can claim for an investment property include:
- Interest on the investment loan
- Home and contents insurance and landlord insurance
- Property agent fees and commissions
- Repairs and maintenance costs
- Council rates
- Decline in value of certain depreciating assets such as timber flooring, carpets and curtains
- Construction costs (“capital works”)
- Costs of advertising for tenants
While individual circumstances will differ, some potential disadvantages of owning an investment property could include
A capital loss
If the property market takes a turn for the worse after you buy a property for investment purposes, it could mean that your property is worth less than you paid for it, and perhaps even less than the value of the investment loan. This is called negative equity. If you have to sell the property, you could make a capital loss, which means you may have to pay the bank the difference between the property sale price and any leftover amount left on the loan.
If you can’t find a tenant for a period of time, you will have to pay the mortgage without the assistance of incoming rent. This could place you in financial hardship.
Tenants can sometimes also pose a financial risk if, for example, they were to damage a property or cause strife and need to be evicted. This could cause financial loss if you have to repair the property or pursue legal action to evict them.
Maintenance and expenses
If you own an investment property and want to be able to attract and retain prospective tenants, you must generally keep it in an inhabitable condition and fix safety concerns promptly. To protect your asset, you may also need to carry out regular maintenance, such as painting, as well as pay regular expenses, such as council rates.
These are just some of the possible pros and cons of owning an investment property. It is a wise idea to consider all costs before deciding to invest in property, and obtain qualified independent advice.
How to compare investment home loans
Trucapital currently compares more than 4,000 home loans, to provide home buyers with certainty and confidence when they compare mortgages and interest rates.
Use our home loan comparison selector to compare investment loans by inputting the information that applies to you, selecting ‘Investing’ in the ‘Loan Purpose’ field, and then hitting the “compare” button. You will be presented with a list of products, which will typically be ordered according to their Trucapital Star Rating, or their applicable interest rates. You can change the order of the listed results by adjusting the settings at the top of the list, and change what is in the list via the filter function.
When it comes to comparing home loans, the interest rate is an important consideration and can make a significant difference in the total cost of any loan. However, there are a number of other factors you may also want to consider. These factors include:
- any fees attached to the loan
- the features available, including an offset account or redraw facility.
When you compare home loans with Trucapital, you can easily view the advertised interest rate and comparison rate, as well as the fees and features attached to each product. The product’s Star Rating is also displayed, to help you find a home loan that has been deemed to offer outstanding value by Trucapital Research.
Comparing interest rates
Home loan interest rates can vary significantly between home loan providers. Because home loans are a long-term debt, even small differences in interest rates can make a big difference to the total amount you will pay on your loan over its lifetime.
A home loan comparison rate is designed to give borrowers a more accurate indication of the true cost of a loan and incorporates factors including the interest rate as well as most fees and charges.
Use our Mortgage Calculator to help you work out what your interest rate could cost you, both in monthly repayments and over the life of the loan.
You can use our website to compare the features of a wide range of home loans that may be available for your situation.
Learn more about the features you may want to consider in our Trucapital Home Loans Star Ratings report. A summary of the features that Trucapital researches and rates in an outstanding value home loan are contained in the Methodology attached to the report.