Investment loans
There are two types of loans which have features to attract investors:
Interest-only loan
Often when borrowing for an investment property, or other investment, it may be tax effective to repay the loan on an interest-only basis.
Understanding the difference between a standard principle and interest loan and an interest-only loan is important.
If you had an interest-only loan and you only pay interest for the first five years, the loan amount will be the same after five years. For example, if you have a $400k loan, and spend five years paying off the interest, you will still have a $400k loan. This is a good approach if you also have a residential home loan. For your home loan, your focus should be on reducing the principal which is considered a non-deductible debt before you worry about paying off the investment loan.
As with most investment decisions, you should seek advice from a professional before committing.
Line-of-credit loan
A line of credit loan allows you to free up the equity you have in your home for other purposes. It’s an interest-only loan where a borrower can draw on the funds as needed. There is a set limit for the loan and the equity in the property is used as security for the loan. It’s a good option for borrowers who want to, for example, purchase a car or complete some household repairs. They can use this facility and only pay the interest rate of a home loan rather than a higher rate of a personal loan.
It’s similar to using a credit card but the spending limits are higher, and you must provide your property as security. We only suggest these loans in special circumstances.
Loan structures
Fixed-rate loans allow you to fix your interest rates and repayments for an agreed period of time. This is generally set for one to five years, but can be up to seven years. At the end of the fixed term period, the loan will generally revert to a variable loan or you may choose to roll over for another fixed term at the rates applicable at that point in time. This is also a good time to review your overall financial position, and see what other loan offers are available.
Many clients like the fact that these loan repayments will not change during this period and with absolute certainty, they can budget their repayments.
The interest rate in a variable interest loan is, as you may have guessed, variable. The interest rate charged by your lender may vary throughout the life of the loan according to market conditions and indicators such as the Reserve Bank of Australia’s cash rate.
In other words, the repayments associated with the loan can also go up or down at any time. Many variable loans now offer a wealth of features such as an offset account or the ability to make extra repayments and redraw funds. Some institutions also offer basic or ‘no-frills’ variable loans with a lower interest rate but fewer features.
You'll often hear the media refer to the “standard variable interest rate” or SVR. This a benchmark rate, used by banks and lenders. These rates are not what customers usually pay, as they are typically only referenced rates and they are certainly not the rate a lender will offer you. When a lender says they will give you a discount of 1%, they are discounting off the SVR.
The amount of your loan will generally have a direct relationship to the amount of discount offered. If you decide to choose a variable interest home loan, a lender will generally offer you a discount on the variable rate anywhere between 0.10% and 0.70%, depending on the size and features of the loan. Larger loans with low LVRs can attract a discount of up to 1.4%.
Categories of variable interest rate loans are the basic variable rate loans, which often feature lower interest rates. These loans tend to have limited features, although most will give you an option to redraw.
Honeymoon and introductory loans offer you a lower interest rate, discounted from the standard variable rate at the beginning of your loan. This can assist you in the first few years of your loan; however, honeymoon rates tend to revert to a higher variable rate at the end of the term.
Often, clients then consider a refinance option but please remember that there are costs involved in refinancing.
They are usually variable rate loans that only last for a short ‘introductory’ period of around one year although the term can vary from six months to up to three years. Sometimes these rates may be fixed or capped during the agreed time period.
To understand offset account benefits, you must first understand that the interest rate payable on your home loan is calculated every day.
An offset account is a separate savings account directly linked to your home loan. The balance held in the offset account is offset daily against the loan eg $330,000 loan balance – $20,000 offset balance – interest is calculated on that day at 310,000
The account is usually only available with a variable rate loan and not on basic, low-interest loan. To maximize the benefit of your offset account, you would deposit your pay in to the offset and receive a deduction on the interest due on your loan. This interest saving is then used to reduce the outstanding principal or debt.
Redrawing on your existing home loan is a fast and easy option. If you have an existing variable rate home loan and you’ve made additional repayments on your mortgage, you may be able to redraw those funds to use for any purpose.
These are packages offered by lenders that, for the payment of an ongoing fee, offer a range of discounts and special features on their products. The main features are:
- Discounted interest rate
- Fee-free offset account
- Annual fee free credit card
Other features vary between lenders.
If you have a Viridian line of credit, you have the freedom and flexibility to withdraw funds from your home loan up to the agreed limit, or increase your home loan balance to access additional funds. This option is ideal for smaller renovations to your home.
If you're planning renovations, consolidating your debts or just need extra cash, topping-up your home loan could be the perfect solution.
You can borrow additional funds on your existing home loan without taking out a separate loan, saving time and paperwork. You can also take advantage of a lower interest rate compared to some other loan types.
Your home loan should be regularly reviewed and assessed against your objectives, and to make sure you are getting a market leading interest rate. With the amount of competition in the market place today and lenders all competing for your business, you should regularly discuss this with us. We can either approach your current lender to get a better rate, or we can look at other lenders to see if there is a better rate.
A good time to do this is when you are renovating or investing, or just looking to get some extra funds.
FAQs
The idea of property investment is one that appeals to many Australians but is sadly often overlooked because of the misconception that it's only within the reach of the wealthy.
The reality is that with the right finance, planning and strategy, an investment property may be easier to achieve than you think.
One of the key challenges to breaking into property investment is raising a deposit, but there are solutions.
Property buyers are typically required to contribute 10 per cent of the property’s value, and for some , this can be a road block.
But existing home owners may be able to unlock equity, or the increased value- that’s built up in their own home to cover some or even all of the down payment on an investment property.
We can make this an easy process so you have the 10 percent deposit available and will not have to pay any interest until you find the right investment property.
Using equity in your home is often the easiest way to have the ten percent deposit ready for the auction or sale.
We will arrange the release of this equity for you, and you will generally not be charged any interest until you actually buy the investment property. We will make this process easy for you .
Head over to our FAQs page.
