What are Investment Loans
Investment Loans are a type of home loan that Property Investors take out to buy an investment property. It is a mortgage solution 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.
Setting up the loans in a certain way that fits your strategy can have significant benefits to you and your wealth creation journey.
Please see loan types, features and various considerations below.
Usually, home loans are principal-and-interest loans, implying that regular payments will reduce the principal (the original amount borrowed) along with paying off the interest.
However, with an interest only-loan, interest is paid on the borrowed amount for an agreed period at the end of which the mortgage reverts to a principal-and-interest loan and unless the mortgage is refinanced, repayments of the principal’s amount along with the interest have to be made.
Paying interest only (while deferring the repayment of the principal) has tax advantages for investors.
Fixed or Variable
Fixed interest rate loans involve mortgages with a constant rate of interest for the entire term, regardless of the prevailing interest rate.
On the other hand, with a variable interest rate on your mortgage, the interest rate varies in accordance with the market interest rates.
The deciding factor between the two options will depend on the interest rate environment when the mortgage is taken out, the expectation for the future and the real estimated lifespan of the loan.
Line of Credit
A line of credit loan is where the lender will approve a certain amount, which you will be able to access from your account.
You can withdraw as much money you need, up to the amount agreed.
The interest will be charged on the amount you drew out from the approved sum.
This is a type of short-term loan to finance the building of a home or another real estate project.
A home buyer or builder takes out a construction mortgage to cover the costs involved in the project before acquiring long-term funding.
You receive your loan in increments, letting you pay for invoices as they come in.
while the construction is in process, you will have to pay interest on the amount you draw from the funds available to you.
An introductory or honeymoon rate is often quite lower than other home loan products.
However, this decreased rate only lasts for a certain fixed amount of time.
Borrowers can use a honeymoon loan to find out how their mortgage works as they will have to pay a lower rate of interest at first.
Other borrowers utilise this time to make additional repayments so they are not only ready for when the rates relapse, but they also put additional money towards their mortgage loan.
For investors who want to avail the advantages of different types of loans, a split loan might be the best option.
This enables you, for example, to minimise the risk if the market is hard to predict and the interest rates are uncertain or enjoy different features that come with different loan types.
100% offset Account
An Offset Account Loan has a deposit account linked to the mortgage so any surplus funds that you might have, for example, rental income, can be deposited into the deposit account and this is offset against the loan it is linked to.
For example, if the loan amount outstanding is $500,000 and there is $10,000 in the offset account, the interest that is charged on the mortgage will be calculated on $490,000. The effect this has is that you pay less interest on the mortgage.
Offset Account loans vary in the amount that is offset, which means that some lenders may offset only 50% of the funds held in the account while others offset the full 100%, so paying attention to ensure you secure the best mortgage for your needs is imperative.
A redraw facility allows you to borrow the money you have repaid already and is generally accessible with a varying interest rate.
This allows flexibility with the repayment method. If you have some extra savings, you can use that to pay off the mortgage loan.
For instance, your minimum monthly repayments amount to $200 and if you pay $500 every month for 6 months, you will have paid a surplus of $1,800 in addition to what was required of you to pay. You can then access the surplus $1,800 through the redraw facility.
All in One
If you opt for an all in one loan, you can use the loan account for your incomes and expenses.
This means all your income comes into the loan account and you can pay your expenses from it.
The money you deposit into the account will go towards paying off the mortgage but you are free to withdraw the cash in the account, as and when needed.