As investing in property plays a key role in many Australians’ investment strategies, lenders offer a wide range of investment home loans designed specifically to meet this need. Investment loans are generally used to buy a property which is then rented out as a means of generating income, but which could not otherwise be purchased without a loan.
The sort of investment loan you finally choose will ultimately depend on a variety of factors, including your age, savings and income, the area in which you purchase a property, your investment goals and strategy, and your retirement plans, as well as others factors that may be specific to your family and circumstances.
Some of the most common sorts of loans taken out by Australian property investors are outlined below.
>Interest only investment loan
Interest-only loans are particularly effective as part of a property investment strategy as the repayments at the outset of the loan are lower, as you are only repaying the interest on the loan, not the principle.
This can be a good strategy because at this time you will likely incur a number of other costs associated with your investment property, meaning you are better able to meet these additional overheads. In addition, an interest only investment loan can be effective because by the time you are required to start paying back the principle as well, growth in the value of the property can compensate for the increased repayments.
> Variable rate investment loan
A fixed rate investment loan gives you greater certainty, as for the term of the agreement your repayments remain the same, regardless of what the Reserve Bank does. Fixed rate loans can usually be written for periods of between six months and ten years, and so they allow you to plan ahead and manage your budget for this period of time.
> Fixed rate investment loan
One of the most significant costs when buying a first home is the deposit. In most cases, you will need to have saved or have access to a sum equivalent to 20% of the purchase price of a property before a lender will consider giving you a home loan.
However, there are also other initial costs that you will incur. For instance, you will need to have any prospective property professionally valued, and you may also be required to undertake a pest and building inspection.
In order to complete the purchase, you may be required to pay stamp duty (a state government tax), as well as conveyancer and/or solicitor fees.
In terms of additional, regular costs besides the repayments on your home loan, you might also decide to take out mortgage protection insurance, a form of personal insurance that covers you in case you default on your mortgage, and can cover the cost of your regular monthly repayments if you die, become seriously ill with a medical condition, or lose your job. This will add to your regular outgoings as well.
> Construction loan
A popular strategy for property investing in Australia is to build a new house and then rent it out immediately. Construction loans are designed specifically for this purpose, as during the building phase you only pay the interest on the loan, rather than the principle. Once the property is completed, you can generally then convert your construction loan to a variable rate, fixed rate or split rate mortgage.
> Self-Managed Super Fund investment loan
A Self-Managed Super Fund (SMSF) can be used to purchase an investment property, albeit under a number of restrictions and conditions. It is important to get expert advice before proceeding too far down this path.
How to go about getting a loan and buying an investment property
One of the most efficient ways of buying an investment property is to use the equity in your home.
Equity is the difference between the current value of your property and the amount remaining to be paid off the mortgage. If your home is worth $500,000 and you have $200,000 outstanding on your home loan, your equity is calculated at $300,000.
As long as you have paid off at least 20% of your mortgage, you may be able to use as much as 80% of the equity in your home in the purchase of an investment property (in the example above, for instance, you would be able to access $240,000).
Therefore, if you have built up some equity in your property, and have some access to additional funds should unexpected costs arise, getting an investment loan in order to invest in real estate may be more attainable than you think.
How can I build equity in my home?
There are a number of ways in which you can proactively build equity in your home. Making additional home loan repayments whenever you can is helpful, as is increasing the size of your regular repayments.
Refinancing can also help in this regard, as renegotiating the terms of your mortgage or changing lenders could lead to lower repayments, which means that if you are still able to repay your home loan at the same rate, you are bringing down the principle quicker and thus growing your equity.
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