Investing in property

An investment property loan is a loan which has been obtained to purchase an investment property or where the property securing the loan is used for investment purpose. In contrast to a loan used to purchase your principal place of residence, investment property loans in Australia carry a higher interest rate and have a lower loan-to-value ratio (LVR) limit. Many lenders in Australia will allow individuals wanting to purchase their own home to borrow up to 95% of the property’s value, whereas an investment property loan is mostly limited to 90% of the property’s value.

Investment property loans work in much the same way as every other type of loan, where a sum of money is borrowed and needs to be repaid with interest in regular, often monthly, instalments. Repayments on an investment property loan can be either principal and interest or interest only. Interest only terms are usually limited to an initial period of up to five years, when the loan would then revert to repayments of principal and interest.

The deposit for an investment property loan could be made with cash savings, or equity in an existing property could be used to provide additional security on the loan allowing the individual to borrow a higher amount. In some cases where equity in another property is used, a borrower may borrow 100% of the investment property purchase price plus any associated costs, such as stamp duty. When purchasing an investment property, the actual or proposed rental income that it will generate can be included as income on the investment property loan application, however lenders will not include the full rental income amount to allow for any short term tenant vacancies and some of the costs associated with the owning and maintaining the investment property, such as agent fees, body corporate fees, council rates, and maintenance costs. Any ongoing rent, board, or home loan repayments for your current primary place of residence will be included on the loan application as an expense, and in the case where you are living with parents or family/friends for free, most lenders will include a nominal allowance for rent/board.

Loans for an investment property can be fixed rate or variable interest. Investment property loans are usually separate loan accounts to other home loans for accounting purposes, as investment property loans are treated differently to loans for your own home when it comes to taxation.

Call us at Intro Finance to find out more.