Investment home loan rates

What are investment home loans?

An investment loan is a mortgage investors use to buy investment properties. Investment loans have higher interest rates than owner-occupier loans because lenders view investors as riskier borrowers.

Investment loans: Basic facts

Fixed or variable rates

Investors can choose fixed or variable repayments. Variable rate loans are easier to pay off faster or refinance without an exit fee and are currently lower than fixed rate loans.

But a fixed rate loan lets you lock in an interest rate and forget about rates rising. There's also the option of splitting your loan into fixed and variable portions.

Interest-only repayments

Most borrowers choose principal-and-interest repayments. You borrow money and pay it back, plus interest. Investors can do this too. But they have another option.

Interest-only investment loans start with very low repayments because you're just paying the interest charges. These loans cost you more in the long run. But they let investors maximise their tax-deductible debts in the short term.

Tax deductions

As an investor, most expenses related to owning and maintaining your investment property are tax-deductible.

This includes your loan fees and your loan interest charges. If your investment costs you more than it generates in rent, you can offset the cost by reducing your tax bill.

Common wisdom is to opt for an interest-only investment loan so you maximise your tax deductions. And it's a sound approach. The only exception is if you have already paid off the mortgage on your own home. This is not tax-deductible. At that stage, consider going principal and interest and throwing all the money you can at that investment loan to create a debt-free source of income in retirement.

Nicole Pedersen-McKinnon
Freelance finance journalist

How do I compare investment loans?

Property investors should consider the following when finding the ideal mortgage:

• Interest rate. A lower interest rate means lower repayments, which makes your investment property less expensive.
• Fees. Avoiding fees where possible can also help make your loan cheaper.
• Loan features. Mortgage features like an offset account can help you build up savings while reducing your interest charges. Offset accounts can be very helpful for investors planning to convert their home into an investment later.
• LVR. Loan to value ratio (LVR) is the amount you can borrow relative to the value of your investment property. The smaller your deposit, the more you have to borrow, and the higher your costs will be.
• Borrowing capacity. Every lender has different lending criteria. It's worth looking at multiple lenders to get an estimate of your borrowing power before deciding on a particular loan or lender.

Investment strategies and tips

Investing in property allows Australians to build investment wealth in 2 ways:

1. Rental income each month.
2. Capital gains as the property's value grows over time.

Many investors ideally want to purchase properties that offer a consistent rental income and a high capital growth over time.

But investors in Australia have a big tax advantage: negative gearing. Even if your investment costs outweigh the rental returns in a financial year, you can use the loss to shrink your tax bill.

"Property investment is a game of finance with some houses thrown in the middle," says Metropole Property Strategists founder and CEO Michael Yardney.

"Beginning investors think they can just go to any bank, get the lowest loan rate and they will be set. But strategic investors don't use finance to buy properties, they set up their finance to buy the time to ride the ups and downs of the property cycle so their investment properties can increase in value, giving them the equity and cash flow to buy further properties.

How do I apply for an investment property loan?

Lenders treat investment properties as higher-risk purchases, which means it can be more complicated to get an investment loan approved.

6 tips to make your investment loan application a success

1. Save a bigger deposit. A 20% deposit is a big ask, but it makes you a less risky borrower (and lets you save on LMI).
2. Check your credit score. A quick check of your credit score is always good idea. Sometimes there are red flags or errors you might not have noticed.
3. Trim your spending. Cutting back on unnecessary purchases in the 3 months leading up to your application boosts your chances of approval.
4. Compare loans and lenders. Every lender has different eligibility criteria. Some may be stricter when lending to investors.
5. Choose your property carefully. If the property you're buying looks like a riskier investment due to its size, property type or location, the lender might reject your application.
6. Talk to a mortgage broker. A qualified broker can help match you up with a bank or lender whose policies and criteria best suit your personal situation.

Risks and benefits of investing in property

Property investment can be both risky and rewarding. Here are some of the potential risks and benefits you should think about.

Frequently asked questions

• Is it harder to get an investment loan?

  Every home loan is a risk for the lender. And investment properties represent a greater risk. An owner-occupier with no other mortgages is a pretty safe bet. But an investor is speculating on the market. They may have their own mortgage too. An investor needs to cover their own mortgage, find a tenant to pay rent and cover the investment loan repayments.

• What is the average investment loan interest rate?

  As of June 2023, the average variable rate investment loan in Finder's database is 6.78%.

• How much can you borrow for an investment property?

  In Australia most borrowers, whether home owners or investors, save a deposit of around 20%. Some lenders are reluctant to lend to an investor unless they have a 20% deposit, but it's definitely possible to buy an investment property with a 10% deposit. You could go lower, but there are fewer loan options if your deposit is 5%.

  When your deposit is under 20% you also need to pay LMI. This can cost you thousands or even tens of thousands, so be sure to factor that in when looking to buy an investment property.

• What is the required LVR for an investment property?

  Loan to value ratio (LVR) means the minimum deposit required for a home loan. Many borrowers save 20% deposits, but you can get a home loan with a deposit as low as 5%.

  This is true for investment property loans too. But there are fewer investment loans with low-deposit options available. Most investors will need at least a 10% or 20% deposit.

• What does an investment loan comparison rate mean?

  In Australia, all home loans come with 2 rates: the interest rate and the comparison rate. This includes investment loans. The comparison rate is a legal requirement that factors in the cost of fees in addition to interest. All comparison rates are calculated on a hypothetical home loan and don't provide specific details about your own potential costs. While a comparison rate is helpful, you're better off looking at the loan fees in detail for yourself.

• How many investment loans can you have at once?

  There's no limit on how many investment properties you can buy or how many loans you can take out. But you do need to be in a strong financial position to get multiple loans to buy multiple investments.

  If you tried to buy a string of investment properties with 5% deposits, lenders would likely knock you back and your credit score would drop. But if you bought one, paid off a good chunk of it and had steady rental income, you could be in a position to finance a second investment – especially if the value of the first one has risen.

  It's a really good idea to talk to a broker if you're trying to finance multiple properties.

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