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What is an investment property loan?
An investment home loan is a mortgage you can take out to buy an investment property — a home you want to rent out to tenants to generate income. You can then use your rental income earned from the property to make loan repayments.
Investment property loans generally have higher interest rates as investors are considered riskier than owner-occupiers (borrowers buying a home to live in).
The latest RBA Housing Lending Rates show the average interest rate on new investor home loans is 6.47% compared to 6.27% for new owner-occupier loans. According to the Australian Taxation Office (ATO), the interest on your investment property loan may be tax deductible.
How does an investment property home loan work?
An investment property loan works much the same way as any other mortgage. You borrow a lump sum to buy a property, and you’ll repay the loan with interest in regular instalments over a period of time (called your loan term). Your investment property will secure the loan until it’s paid off.
Just like with any mortgage application, lenders will assess your loan serviceability based on your financial situation, including your income, savings, and expenses, as well as your loan-to-value ratio (LVR) and deposit or available equity.
The key distinction is that the expected rental income from your investment property will be factored into your ability to repay the loan, along with expenses like property maintenance, agent's fees, landlord's insurance, etc.
Investment loan variable interest rates comparison (March 2024)
Variable rate investment loan | Commonwealth Bank |
|---|---|
Interest rate | 6.60% p.a. |
Comparison rate^ | 6.97% p.a. |
Variable rate investment loan | Westpac |
Interest rate | 6.84% p.a. |
Comparison rate^ | 7.16% p.a. |
Variable rate investment loan | NAB |
Interest rate | 7.36% p.a. |
Comparison rate^ | 7.41% p.a. |
Variable rate investment loan | ANZ |
Interest rate | 7.84% p.a. |
Comparison rate^ | 7.84% p.a. |
| Variable rate investment loan | Interest rate | Comparison rate^ |
|---|---|---|
Commonwealth Bank | 6.60% p.a. | 6.97% p.a. |
Westpac | 6.84% p.a. | 7.16% p.a. |
NAB | 7.36% p.a. | 7.41% p.a. |
ANZ | 7.84% p.a. | 7.84% p.a. |
Investor tip: Choose an investment property based on thorough data analysis, considering median rents and vacancy rates in the area you’re considering buying in and additional costs like strata fees, maintenance costs, etc. Most mortgage brokers recommend running a budget on your investment property in the same way that you would a business or personal budget. The numbers should always drive your decision making when purchasing an investment property.
Types of investment property loans
Variable rate vs fixed rate investment loan
- Variable rate investment loan: The interest rate on your mortgage will fluctuate in line with the market. This means you can benefit from lower repayments when interest rates drop, but your repayments will be higher if they go up. Variable rate loans provide investors with more flexibility, including the option to make unlimited additional repayments and access to features that can reduce interest payable, like an offset account.
- Fixed rate investment loan: The interest rate on your mortgage is fixed for a period of time — typically between one and five years. Your repayments will be fixed during the fixed rate period, protecting you from rate rises, although this means you won’t benefit from lower repayments during rate cuts. You will revert to a standard variable rate at the end of the fixed term. Investors may choose a fixed-rate loan for certainty over repayments, essentially ensuring that rental income will cover loan repayments throughout the fixed-rate period. Fixed rate home loans may have limited features, and making extra repayments may incur costs.
- Split loan: This is when a portion of your home loan is fixed and the remainder is on a variable interest rate. This option provides both the flexibility of a variable rate loan and the certainty of a fixed rate loan. Investors can choose how to split their loan, whether it's 50/50, 60/40, or 70/30.
Principal & interest vs interest-only investment loan
- Principal & interest investment loan: Your repayments cover both your loan principal and interest. In this case, your regular payments are higher, but you'll pay less interest over the life of the loan.
- Interest-only investment loan: You only pay the interest portion of your home loan for a set period (up to five years). Your repayments will be lower during the interest-only period, but you'll return to higher repayments afterwards (when you start repaying the principal). You’ll also pay more interest over the life of the loan. Investors commonly use interest-only loans to free up cash flow for other investments and maximise interest expenses, which are tax deductible.
Why do investors favour interest-only home loans?
Investors may choose an interest-only home loan to reduce their mortgage repayments initially, allowing them to redirect or reinvest their cash flow elsewhere (instead of having it tied up servicing the loan). This can help prepare for higher repayments when the interest-only period ends.
In the meantime, their investment property could also build equity through capital growth, which they could leverage to refinance or buy another investment property. However, there is always a chance that a property might decrease in value.
Additionally, investors have less incentive to pay down the loan principal since interest payments on investment loans may be fully tax deductible. Making interest-only repayments allows them to offset all or part of their borrowing costs against their rental income, and reduce the tax payable on their investment.
Tax implications of offset account vs redraw facility
Using your offset account won’t impact your interest tax deductions. Your offset account is a separate transaction account from your home loan, allowing you to deposit and withdraw money at any time.
On the other hand, accessing money through your redraw may be treated as a separate loan. If you use your redraw money for purposes unrelated to your investment, you may need to allocate the interest charged on the loan into deductible and non-deductible portions, according to the ATO.
In either case, speak to an accountant to understand the tax implications of your investment property loan, regardless of whether you're using a redraw facility or an offset account.
How to compare investment property loans
Use a mortgage broker who can recommend the right loan structure
Work with a mortgage broker familiar with your investment strategy and financial requirements. They can assess various investment loan options and put forward your best loan structure. For example, they may recommend an interest-only loan if you want to maximise your tax benefits and free up cash flow or a variable rate home loan with an offset if you’re looking to pay off your debt faster.
Establish a benchmark of the ‘lowest interest rate’
Find the lowest available interest rates on investment property loans from various lenders as a baseline for comparison. For example, if the prevailing lowest rate for your LVR and circumstances is around 6.50% p.a., any rate above may not be competitive.
Consider both the interest rate and the comparison rate
While the interest rate shows the percentage of interest you'll pay on your investment property loan, the comparison rate shows the overall cost of the loan — including interest and fees.
Consider investment loan features
You should ideally look for an investment loan with an offset account and redraw facility. These features can help you save on interest while retaining access to extra funds when you need them. An offset account reduces your interest costs by offsetting the balance of your loan.
How to apply for an investment property loan
1
You can apply for an investment property loan online via the lender’s website or through a mortgage broker who will handle the entire application process from start to finish (settlement).
2
When you submit your application, the lender will first assess your borrowing capacity based on the financial information you provide, your deposit amount (or usable equity) and the type of property you’re buying.
3
If you meet the lender’s preliminary requirements, you’ll be asked to submit your income documentation, including payslips and tax returns.
4
The lender will then conduct a serviceability and credit check before processing your application to the pre-approval stage (when you’re approved in principle to borrow a specified amount).
5
Once you make a formal offer on a home, the lender will order a property valuation, and you can receive unconditional approval.
6
Your loan funds will be released and the loan will be secured by your investment property.