Lending Solutions

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Investor

We think purchasing and lending got way too complicated somewhere along the way. We are here to help make the lending process better by providing you with REAL solutions. We say it how is, in your terms and on your terms.

Investor Loans

Investing is a great way to make your money work for you. An investment loan is a loan that is used to buy real estate that will become an investment property. An investment loan is a solution for people who want to buy a property and rent it out to receive income, but need a loan to help with the purchase.

Investment loans are different to other loan types and it is important to understand the different Lender requirements for these loans to ensure that you get the right one for you.

What is the difference between interest only loans, lines of credit and offset facilities?

There are different types of investor loans suitable for various purposes

Interest-only loans. With this type of loan the investor or borrower will only pay the interest on the loan for the first few years This is usually 1-5 years after the loan is disbursed. This can be subject to negotiation if you want to make it longer. Since interest payments are tax deductible, this will give you time to adjust and strengthen your finances and your investment. You can use the extra money wisely by increasing the value of your house so you can charge a higher rent. It is advised that you use this period wisely because after the interest-only phase, the monthly payment will be a lot higher as the principal payments are added. Keep in mind though, you will likely pay more interest over the course of the loan.

Lines of credit. A home equity and a credit card rolled into one. When you borrow a home loan and pay off a portion of it, that payment becomes the equity that you can use. Or you can use the home equity if this is your primary house. This will allow you to use an existing equity as capital for an investment property. Once you repay the loan, that can be a line of credit that you can redraw – as long as you can keep track of it for tax purposes. If you do not want any repayment, you can choose not to withdraw this. The bottom line is, the equity of the house can easily be liquidated if there is a need to do so. Lines of credit are something that investors can use to purchase another property for investment.

Offset facilities loan. For this loan, you will be required to borrow a standard home loan and then link it to an offset facilities loan. It can be likened to a savings account. You will receive a bank card that will allow you to make electronic transfers or withdrawals from an ATM. Now the key to benefit from this, lies in how much money is in the offset account. If, for instance, your mortgage is $300,000 and you have $25,000 in your offset account, the interest that will be charged to you will only be based on $275,000. The more money you have in your offset account, the less interest will be charged to you.

How much can I borrow?

The amount that you can borrow on your investor loan will depend on a couple of factors.

  • Your disposable income. This is the money that is left from your income after you pay for your monthly living expenses (living expenses include items like rent, transport, groceries, social, insurance premiums etc).
  • Your current loan repayments. These are your current liabilities like car and credit card repayments.
  • Your proposed loan Repayment. After deductions have been made for income, living expenses and your current liabilities your remaining income will need to be able to comfortable cover your new loan.
  • The size of your Deposit and/or equity. Lenders will require a deposit to be contributed towards your new purchase or for there to be sufficient equity in your property if you would like to refinance. Without these a lender can limit the loan they are prepared to offer.
  • Your Current Credit Worthiness. Lenders will also look at how you have been paying your current liabilities and living expenses. Your proven ability to regularly pay your rent and car repayments will have a positive impact on how much you can borrow.
What is the typical investor loan interest rate?

In choosing your investor loan, you have three options when it comes to the interest rate.

  • Fixed interest rate. This is a type of interest wherein you have only one rate for the whole term of the loan. You will use the existing interest rate at the time of the loan application. This is actually the most popular among the other types because it allows the borrower to plan their payments more efficiently.
  • Variable interest rate. This means your rate will go up or down – depending on the market index. It will make your monthly payments different from time to time. Because of the flexible interest, it also offers flexible features like being allowed to redraw. Since the interest rate is tax-deductible, you need to continually update your information so you can enjoy this tax benefit.
  • Split-interest rate. This is when you combine a fixed and variable rate in your loan. You can opt to use a fixed rate first and then get a variable interest rate after a few years. Or you can have it the other way around.

Choose the interest rate that can help you meet your payments. If the variable interest rate is low when you get the investor loan, you can choose this type of loan. Or you can opt to choose the split-interest rate that allows you to use the variable rate and then switch to a fixed rate in the future.

Find out more about interest rates.

What are the benefits of investing in property?

Investing in a property is beneficial in so many ways.

The investment property may increase in value. Over time the value of the investment property could increase. This is called capital appreciation and is a key part of investing in real estate.

The best example of a passive income. A passive income means you only work on something in the beginning and it will continue generating revenue long after the effort.

Real estate provides a secure, low-risk, and long-term investment. Unless something adverse happens in the location where you bought the house or in the economy, you can expect it to continue to receive rental income for a long time. The real estate market is considered to have low volatility – this means that the movement in property value and rental income is relatively stable and should not change in value materially over a short time.

Rental rates can provide a sizable income over the long term. Once a home loan has been paid in full, the rental income will continue to be paid. This can provide people with a steady income stream.

Negative gearing can reduce your taxable income. It is natural for you to pay taxes, not just on the property, but also on the rental income that you are generating. Depending on your personal circumstances, you might be able to use negative gearing to help reduce your personal income tax.

What are the risks of investing in property?

All forms of investment come with a risk. Although there are several benefits, there are also risks when investing in a real estate property.

The mortgage comes with other costs. Before you concentrate on the investor loan, make sure you calculate the other costs required to complete this transaction. Just like a traditional home loan, a property investor loan will require a deposit, stamp duty, property appraisal charges, and legal fees – among others.

Owning the property entails costs. You need to pay for the insurance, property taxes, and the regular repair and maintenance of the house. This can be taken from the rental income but nevertheless, it will reduce the income that the property will generate for you.

Income may not be enough. The housing market will define how much money you can charge for the lease of your property. While you have the option to charge as high as possible, a high rental rate can turn off potential tenants.

Rental income will depend on occupancy. A rental property is only useful when it is being leased. You may encounter financial difficulties when you are in between tenants. The property taxes, insurance, and other upkeep costs will not stop even if you do not have a tenant.

Property values can go down. While this is never permanent, the housing market can force you to lower your rental income. It could make homeownership costs quite a burden.

Damage to the property can make you lose your investment. A fire or a natural disaster that is significant enough to destroy the structure can make you lose a lot of money. This is true even if you have the house insured.

Liquidating this investment will take time. In case there is a need for fast cash, this is one investment that you will have a hard time liquidating. It can take months and even a year to find the right buyer that you can sell the house to for profit.

What is negative gearing?

This is when the cost of owning the rental property is higher than the income it generates. It is a factor that an investor takes into consideration whether to invest as it can provide additional benefits.

For instance, let’s consider the scenario that you bought a house for $500,000 and used an investment loan of $400,000 to help purchase the property. Let us assume that your annual interest repayments each year amount to $24,000. If the property is earning a rental income of $25,000 a year, you have a shortfall of $5,000.

If in that 1 year, the property value rose by 10%, that means it is already valued at $550,000. That is a growth of $50,000. Even with the $5,000 shortfall on rental income, you still gained $45,000 in one year.

Of course, there is a risk here because not having a tenant or a small capital growth can compromise the overall gain from your investment. However, there are other ways to benefit from this investment strategy.

Negative gearing will also generate a tax loss which can be offset by the other income that you are earning, which in turn will allow you to generate savings. For example, the rental income is $20,000 but interest payments, property costs (rates, strata and insurance), letting fee and property depreciation cost $28,000. That means you have a tax loss of $8,000 and that can be used to reduce the taxes you will pay on your other income sources. It is important to gauge your losses in a financial year so you can leverage your rental property losses and turn it into something that your other sources of income can benefit from.

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