Your guide to Investment Loans for property
There are certain things to look out for when selecting and applying for an investment loan for your property. Here we look at the main differences, the most popular investment loan types, and how to get the best mortgage for your situation.
Interest-only, fixed, variable, offset – finding the investment home loan that’s right for you can seem like a minefield of financial jargon and conditions.
The key to finding the right loan is to have a clear investment strategy: are you going to renovate and sell, or stay on for the long term and ride the property wave?
Fixed interest rate loan
Arranging a mortgage with a fixed interest rate gives you certainty – you’ll know up-front what you need to repay annually. This means that once you know what you are going to receive in rent you can estimate whether there will be a cash surplus or deficit and manage your cash flow accordingly.
Some lenders allow you to prepay up to 12 months’ of interest on this type of loan potentially bringing any eligible tax benefit forward; speak to your tax advisor about claiming the payment as a tax deduction.
Bear in mind that many lenders will charge you a break fee if you repay more than the fixed rate allows for. Before making any extra payments, check with your bank. And if you plan to make additional payments during the life of your investment loan, make sure you enter into a loan that doesn’t charge these break fees.
Variable interest rate loan
Your payments will fluctuate with a variable interest rate mortgage, but the pay-off is flexibility – if the investment loan has a redraw option, you’ll be able to redraw funds from any extra payments you may have made.
You can also choose a split loan, with a mix of fixed and variable interest rates. Package home loans may feature split rates, along with credit cards, waived fees and other products.
As the name suggests, with interest-only loans, you won’t pay anything off the principal. If the value of your property increases, you’ll have that equity even though you’ve paid nothing off the principal. If the market flattens, however, you might not have any equity.
The sweetener for investors is that, unlike principal repayments, interest payments are tax deductible. Please check with your accountant or financial planner for tax implications.
You can also choose an interest-only loan for a period of time while you renovate. Your repayments are less than if you’re paying the principal plus interest, so you’ll have cash up your sleeve to pay for your renovations.
An interest-only mortgage can be arranged for up to 10 years.
Products such as interest offset accounts allow you to use your mortgage as a kind of savings account, offering great flexibility and with interest calculated daily.
For example, you could have your salary paid into your offset account, which is linked to your home loan. The balance of your mortgage will be reduced by your offset balance, meaning that you’ll pay less interest over the long term, and you’ll still be able to withdraw your cash when you need it.
Most offset accounts are linked to variable rate loans rather than fixed rate loans.
Line of credit
Also known as a home equity loan, a line of credit home loan allows you to use the equity in your existing property to secure your investment loan. Rather than receiving a lump sum, you can access as much or as little of the loan as you need, meaning financial discipline is key. Canny borrowers can have their salary paid into their line of credit loan account, to offset the loan.
Whichever investment loan you choose, seek professional advice from a mortgage broker and shop around to compare competitive rates.
Investment loans have stricter eligibility restrictions, may require a larger deposit than other home loans, and often incur a slightly higher interest rate. You’ll also need to have funds to cover potential costs or loss of rental income if your property is untenanted for any length of time. The trade-off is that as a landlord you can claim associated expenses as tax deductions.
Finding an agent
It is good to have an agent running your rental property so you can take a step back from managing your property. Always do your homework to identify and select a reputable agent. They should be able to demonstrate a strong marketing program and well-managed processes for organising rental payments, repairs, maintenance and inspections. Also ensure that your agent has an excellent screening process, including checking prospective tenants’ rental, credit and employment history, and asking for professional references.
Tenants – why they are important
Good tenants can actually mean the difference between a high and a low-performing investment. In fact, finding a great tenant may be just as important as finding the perfect location for your investment property.
It’s important to look after the tenants in your investment property – it encourages them to stay long term and take care of your property. So how can you keep your tenants happy? By treating your property like a business and your tenants like valued customers.
Minimise your maintenance costs
Good tenants will treat your property like it’s their own, so you’re less likely to find unpleasant surprises when they leave. By respecting your investment and keeping it clean and tidy, it will show less wear and tear as the years go on. Quality tenants may not bother you with small maintenance issues such as looking after the garden. This can save you both time and money which helps your investment loan.
When a tenant pays their rent in full and on time, it saves you both time and stress. You won’t need to chase them for payment, and it will assure you a healthy cash flow. Quality tenants are also likely to see out their full notice period when they decide to move out. Good cashflow really helps when paying your investment loan.
Every time a tenant ends their lease it can cost you money and has an impact on your investment loan. Advertising and open-house inspections add up, and when your property is empty you don’t have rental income coming in.
Keep the peace
Even though you don’t have to live in the neighbourhood, it’s important to be on good terms with those who do. After all, nobody wants to live next door to a loud rock band. Happy neighbours will look out for your property and be less likely to make malicious complaints.
A consistent and reliable tenant will look after your property and help you generate the best returns for your investment loan. When you attract a high-quality tenant, you can rest easy knowing that your investment is in good hands.
Your Reputation counts
Reputation counts these days, business reviews – both good and bad – are shared widely on the internet and social media. There are even websites dedicated to reviews of dodgy landlords, and you don’t want to appear on them – that’s the kind of online exposure no landlord wants.
Know the law
Residential tenants have legal rights. These differ from state to state, but it’s vital for you as a business operator (landlord) to know and respect the law if you want to maintain good relations with your customers (tenants). Make sure to seek professional legal advice if you need more information.
Residential tenancy laws in Australia cover many aspects of tenancy including:
• when and how the landlord can access the property
• who’s responsible for repairs and maintenance
• when and how each party can give notice to vacate a property
• how to introduce rent increases
• how bonds and security deposits should be handled.
Tips to keeping a good relationship:
• Make sure your relationship starts on the right foot.
• Respond to your tenants’ needs. Listen actively and seek workable solutions to any problems.
• Make yourself available and ensure your property manager has provided the appropriate contact information should any issues arise
• Respond to requests for repairs in a timely way. Urgent repairs may require quicker response times.
• Treat your tenants the way you would want to be treated.
• Keep in mind that people remember how you make them feel and may base their actions towards you (and your property) on those feelings.
• Treat them with respect, there’s a good chance they’ll respond in kind. This can lead to longer tenancies and a reduced vacancy rate – which means more money in your pocket.
If you’d like to know more about how to make the most of your investment loan, your mortgage broker is a great resource.
Need some Advice about loans?
A mortgage broker can help you find the right loan and secure the finance that’s most suitable for you. It will also ensure you avoid making mistakes.
Any questions you may have regarding loans, contact Annette Tothill on 0420 973 551.