Choosing the right investment property home loan

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Choosing the right investment property loan.

Buying a residential property versus purchasing an investment property involves entirely different considerations. If you plan to live on the property, your priority will likely be ensuring it meets your personal needs. You’ll be thinking about such factors as its proximity to your child’s school or your workplace and the features of the home.

Adversely, when searching for an investment property, your focus is likely to be its earning potential, the local vacancy rate, and opportunities for capital growth. By extension, the home loan that works best for the purchase of your investment property may differ markedly from the home loan that is ideally suited for an owner-occupied property. Most importantly, your investment property home loan should cater to your needs as an investor.

That said, here are the vital criteria to be on look-out for when selecting the right home loan for your investment property purchase.

Interest rate type
There are three interest rate options to choose from when signing up for an investment property home loan:

Variable rate

As its name suggest, this home loan’s interest rate fluctuates as determined by the official cash rate and your lender's funding costs, meaning your monthly repayments will move up and down accordingly.

Fixed rate

In this case, your interest rate is fixed for an agreed period, meaning your repayments remain affected by fluctuations in the official cash rate.

Split loan

This type of loan aims to offer the best of both worlds, with the interest rate that is partly fixed, partly variable.

Repayment features

100% redraw offset facility

A redraw offset facility is a sub-account linked to your home loan. The idea is to allow you to offset your home loan balance with the funds available in your savings account, so reducing the interest owed. What’s more, you can withdraw money from your account using a linked Visa Debit card.

Let’s say your home loan balance is $400,000, and you have $30,000 in a redraw offset account. Because your redraw offset account is linked to your home loan, the $30,000 in your redraw offset account will be 100% offset against the home loan balance. That works out to $400,000 - $30,000 = $370,000, meaning you only pay interest on $370,000 rather than on the full $400,000.

And bonus, you can withdraw funds from the redraw offset account at any time. However, it’s worth noting that while having a redraw offset facility reduces the amount of interest payable, the value of your repayments remains unchanged, so helping you pay off your investment property home loan faster.

Another point to ponder; a redraw offset facility is only available with a variable rate home loan.

Principal and Interest loan

You may be familiar with the Principal and Interest (P&I) repayment type. If not, it means you are essentially repaying the principal – or original loan amount – as well as the interest as it’s charged.

Interest Only loan

An alternative repayment option to consider when securing a home loan is Interest-Only terms. In this case, you pay down only the interest on the loan, and none of the principal, for a set period of time.

The primary advantage offered by an interest-only loan is reducing your repayments in the short-term. However, once the interest-only period – typically 3 to 5 years – expires, you must repay the principal and the outstanding interest on the home loan. And while an interest-only loan means lower repayments in the short-term, you will end up paying more interest in the long-term.

Did you know

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