Anytime you talk about investments, the property comes as one of the top ones of all times, and for good reasons. While properties might take a bit longer than some other investments to start making a good deal of profit, it is almost always guaranteed to make some profit at least. While taking out a loan for the purpose surely is a reasonable way to go, in order to be successful with this investment, you need to be smart and strategic. Here in this article, we have talked about how investment home loans in Australia work so that you get a good idea before you get down to the field.

What is an investment loan

A property investment loan is something that you would be eligible for if you want to use a property that you buy as an investment. For example, say, you already have a primary home to live in, or you are living in one of the units of a big multi-units property. Now, you want to buy another property to not live in, but to collect revenue from by renting it out or selling it. In this case, you can apply for an investment loan to purchase this new property, as long as you fit the profile. This property can be either residential or commercial – there are no rules against that.

Usually, investment home loans in Australia finance rehabilitation projects in which houses are purchased, renovated, and then either resold (“fix-and-flip” deals) or rented out. The loans that you can take out to finance these projects are usually approved for a short-term since most buyers go for the fix-and-flip deal. In case you are in it for the long haul, as in, you want to rent the property out, in Australia, you get the option of refinancing your property after or within this short period, where you can begin a conventional long-term mortgage with a more favourable interest rate.

Investment home loans in Australia: A guide

Investment home loans Australia: The rules

Whenever you are buying any property, you have majorly three types of expenses on it – the purchase price itself, the cost for its renovation, and maintenance until you find a suitable party to sell or rent it to. The investment home loans in Australia that you can apply to finance either or both of the first two. You can get this loan from either a bank or a commercial hard-money lender. The lender will evaluate the property’s asking price, the amount you will invest in the fix-up of the property, and the estimated after-repair value. Based on this calculation, the lender will offer a loan within its loan-to-value (LVR) parameters, specifying an interest rate and payback period. In this type of loan, your investment property acts as the security; and this gets seized if you are unable to pay off the loan on time.

Which one is the best investment property loan for you

Everyone has a different income, credit score, and requirement out of his/her investment. So one size does not fit all. The type of investment loan that will suit you depends on you and the investment strategy that you favour.

  • Negative gearing:

If the revenue you collect annually from your investment property is less than the annual expenses that go into your property – the annual interest to be paid and the maintenance charges – the property is said to be negatively geared. If you look it superficially, you are making a loss; but you have to pay less in taxes in this case, which certainly can be beneficial for you.

  • SMSF loans:

Unlike a retail or industry fund which is managed on your behalf, a self-managed super fund (SMSF) is managed by you, yourself. In this scenario, essentially, you are borrowing money from your own savings account to invest in you. On top of it, you can save a lot on taxes if you do it right. The rental income and capital growth generated by the investment property this way become part of your super fund’s retirement savings.

  • Investing by borrowing equity – a line of credit:

An equity against a property, by definition, is the difference between the current value of your property and the amount you owe on it. So if you already have taken a property investment loan and way into repaying it, you would have increased this difference as your purchased property rise in value in the market, and therefore, this difference is eligible for another investment path.

At this stage, you can refinance your investment home loan in Australia by borrowing from this equity itself – it is called a line of credit loan. You can borrow as little or as high from this amount, 80% of your equity is the credit limit, and the interest is only charged on the amount you end up borrowing. There are usually no set repayments, and moreover, interest repayments on investment properties are tax-deductible. However, too much of financial math will go into this method, so it is recommended only for seasoned property investors.

What to look for while choosing the best investment property loan

In order to decide which investment home loans in Australia that you can apply for, you need to consider the following factors if you want your investment to be profitable enough.

  • Decide on an investment goal and set your budget accordingly:

Investments involve money, and so the stake is always high, no matter what type of investment you choose. If you go in without a plan and without a properly organised strategy to apply the plan, you might end up in a lot of trouble.

So first of all, you need to have a financial goal for yourself, and an exact vision about what you are expecting out of your investment. Secondly, no matter what your investment goal is, you need to be 100% sure that your income will allow you to make the repayments. Finally, the type of loan you will opt for will vary depending on whether you want a low-interest rate, a high cash flow, or some other features.

Apart from the types of investment home loans in Australia mentioned above, if you are one with enough in a savings account, you can also create an offset account from it which you can connect to your original loan repayment account. As a rule, both of these will have the same interest rate. So this way, the money you earn every month from this offset account can be used to reduce the loan repayment amount, and you can pay off your loan faster.

  • Decide on an investment strategy:

When it comes to property investment, you have two options – you can either buy and renovate the property and rent it out for several years before selling it, or  you can hold your property for a short period after purchasing it and sell it later at a profit when its value increases.

The first option ensures a steady in-flow of rent which you can use to pay off your interest. For this method, a principal and interest loan will cost less in the long run; and at the same time, you will build equity faster, which you can use to refinance your property investment loan as explained before. In the second situation, you will be making smaller, interest-only payments and repay the entire loan only after selling the property. So if you are certain that your property will grow in value in the future, the second strategy will reduce your expenses as you can use the profit from the sale into repaying your loan.

  • Pick the best interest rate:

Lower interest rate means fewer repayments. So research well and compare lenders to find the optimum interest rate that suits your need. Also, there are a whole range of investment loans you can choose from, some of which vary with the market rise and fall, while others are fixed. Do your homework thoroughly before you take your pick of the best investment property loan.

Conclusion

Investment in an asset like real estate property is profitable only when you play it smart. The above information about the best investment property loans will definitely nudge you in the right direction, yet it is also true that only you will know what will work best for you. So put in the hours as required, and in any doubt, be sure to consult a licensed professional.