Choosing the right loan for your investment property
Your investment property is intended to generate income, so choosing the right loan is just as important as choosing the right property. With the right loan, you can maximise your income and achieve your investment goals.
So how do you choose the right loan?
Establish your property investment strategy
Your property investment strategy will have a deep impact on the type of loan you choose. The most popular strategies are the “buy and hold”, negative gearing and “flipping”. Buy and hold involves long-term ownership of the investment property, so the property appreciates in value while the rental income increases your equity, which you can use to increase your investments. With negative gearing, the annual expenses of a property investment exceed its rental income, making you eligible for tax deductions until the property value increases enough to offset the earlier losses. “Flipping” – a short-term strategy where you renovate a property to sell at a profit – involves more time,
effort and money, and can be risky if you don’t have the expertise to keep your renovations efficient and cost-effective, so they boost the property value in a short time frame.
Pick the right repayment type
Once you’ve decided on your investment strategy, it is fairly straightforward to figure out whether you want a principal and interest loan, or an interest-only loan. An interest-only loan is a good fit if your investment is based on capital growth, while a principal and interest loan is the best option if your investment strategy is based on building equity.
Find the right interest rate
Naturally, you want your interest rate to be as low as possible, so you can channel your funds into further investment rather than paying off the lender. Consider whether you want a fixed or variable rate. Fixed rates give you a sense of stability as you know exactly how much you need to pay, and you are protected when rates rise, although you don’t reap the benefits when interest rates drop. You can try splitting your loan between fixed and variable if you want the best of both worlds.
Find the loan features you need
Loan packages can come with a range of features designed to streamline your saving, spending and investment. It’s worth taking the time to assess which loan features would be most beneficial for you, and which ones might undermine your investment strategy. For example, the loan redraw feature enables you to withdraw any additional repayments made on top of the minimum loan repayment. While this is a great feature to have on your regular home loan, giving you access to extra funds in an emergency, it could derail your investment plan if you keep dipping into the growing equity of your investment. The extra repayments feature is also a good option if you want to grow equity, but not necessary if you are only paying the interest off the loan.
Ask a mortgage broker
With so many loan packages, interest rates and loan features available, it can be difficult to sort through all the options and find the right loan for your investment needs. A mortgage broker can help simplify the system and identify the right loan strategy for your long-term investment plans. Talk to a mortgage broker today to see how you can secure the best loan for your investment property.