Because of the potential benefits that real estate can provide, it is an excellent investment option. Real estate is a stable investment that is less susceptible to market shifts and more likely to offer fixed returns in any economic climate. Renting your real estate investment can help you create a steady stream passive income.

Much like purchasing a home, property investments need substantial financing. An investment loan may be the only option if you don’t have enough money to purchase a home.

What is the difference between an investor loan and a regular mortgage? How can you identify what to look for when getting a loan in order to invest in a home? This guide will help you find the answers.

What’s the difference in an investment loan and a regular mortgage?

An investment loan is for people who are planning to buy or renovate a property and hope to get a return on their investments. Standard home loans, also known by owner-occupier loans, are available to borrowers who plan on staying on the property.

Investment loans can be more costly than regular home loans. They also have stricter eligibility requirements. Because lenders consider investors to be risky borrowers, this is why investment loans are more expensive than regular home loans. The reason is that, unlike owner-occupiers who may feel an emotional attachment to their homes, many lenders believe that investors are more inclined to take financial risks to maximise returns on their investments – which may cause them to default on their mortgage.

Is it possible to get an investment loan for your house?

Background checks are conducted by lenders just like other home loan applicants to make sure that you have sufficient funds to pay your monthly payments. Because of the potential higher risks associated with investors, there are stricter eligibility requirements for investment loans. These are the criteria you will need.

1. Stable employment

Lenders evaluate your annual income by reviewing your tax returns and pay slips. This is done to determine if you are a productive worker. Some lenders may also consider these criteria when determining if you are a good candidate to receive an investment loan.

  • Minimum of 2 years experience in the same company
  • Your new job should be comparable to the one you have previously held.
  • You must not change your career for more than six months.
  • There can be no more than three employers in a two year period
  • It is not permitted to receive significant breaks in employment
  • Your current job does not allow you to be on probation.
  • Self-employed must show proof of tax returns for the previous two financial years.

2. True savings

Most lenders want to confirm if you have genuine savings equivalent to at least 5% to 10% of the property’s value. Lenders will also check if there is any money that you have set aside for the deposit.

3. Good credit history

Your chances of getting money loan approval can be increased if you have a good credit record and a credit score that is above average. This page will show you how your credit score and other factors can affect your ability of getting a loan to your home.

4. Capitalized equity

If this is not your first time applying for an investment loan, some lenders will check to see equity you have built up on your other properties – especially if you are borrowing more than 90% of the property’s value.

What amount can property investors borrow?

Most banks and financial institutions will not lend more than 80% of residential property’s worth and as much as 70% for commercial property’s. But there are cases when lenders are willing to grant loans as much as 95% or even 100% of the property’s value.

For loans exceeding the standard 80% for residential and 70% for commercial, you will need to pay lender’s mortgage insurance (LMI). LMI estimator helps you calculate the cost of covering this one-time expense that protects lenders against financial loss.

This calculator will assist you in estimating the cost of an investment home so you can determine if your monthly budget allows you to afford it.

What are some things to watch out for in an investment loan?

Experts suggest that you consider more than just interest rates when looking for the right investment loan. Experts also recommend assessing if the loan features suit your financial situation. Loan features are designed to help you in a variety of ways – including managing your finances and reducing the length of your mortgage. The best features can lower the cost of your loan, which could help you save hundreds.

Here are some things to keep in mind when you’re looking at investment loans. 

1. Interest-only payments

An interest-only home loan is not eligible for interest payments. The average term of a home loan is five years. The repayment term may be extended depending on your agreement with the lender. The principal amount of your loan will remain the same throughout its term. This feature allows you to lower your monthly payments and save money which can be used for investment growth.

The Australian Taxation Office (ATO) is responsible for determining rental property’s tax liability. You can also claim interest on any personal tax return that you file, if you have a loan. This page will show you how rental property can help reduce your annual tax bill.

2. Set aside account

An offset account is a savings account where you can stash extra money. You can withdraw money from the account or use it to pay your daily expenses. An offset account lowers your interest rate. If you have $450,000 in debt and a rate of 2.75%, but you put $30,000 into an offset account, your rate is only $420,000. This will save you money.

3. Line-of Credit Facility

You can get a predetermined amount of credit without the need for a loan. The amount you borrow is typically secured against the equity you have built in your property and can be used for a variety of purposes – including home renovations, lifestyle expenses, debt consolidation, or another investment property.

However, there are some drawbacks. The line-of credit loans are easy to access funds. These loans have higher interest rates. You also need to pay for the different fees and charges associated with accessing your property’s equity.

4. Repayment holiday

If you plan to make the majority of your mortgage payments with rental income, this feature will be helpful. Repayment holidays let you stop paying your monthly mortgage payments for a set period, usually between one and twelve. This is useful if the rental property is not being occupied and cannot provide steady income to pay your monthly rent.

Interest charges will continue to accrue while you are in a repayment grace period. This means that you will have to pay more for your loan than what you originally owed.

5. You can choose the repayment frequency you want

The option of choosing the frequency of your investment loan repayments should be available to you. Experts recommend syncing your payments with the rent you receive from tenants. If you rent out to tenants who pay rent every week, your repayments should be scheduled on a weekly basis for your home loan. Although this might not be a good idea immediately, it will help you save money in the long-term.

Which mortgages work best for property-investors?

There are many lenders that offer home loans. Compare interest rates and loan features to determine which one is best for you.

Fortunately, Your Mortgage gives you a comprehensive comparison of the best investment home loans available from Australia’s top lenders. Click here for a comparison.