As interest rates rise, home buyers are taking a back seat with applying for home loans and investors are back in the game. RateCity reports on the good and the ugly side of investment loans.
April 27, 2010
The number of investor home loans is on the rise with a 21 percent increase recorded in February of $6.40 billion compared to $5.07 billion in February 2009, according to Reserve Bank of Australia data. Even though the February figure is less than that of the month prior by $73 million, owner-occupied home loans have fallen by 10 percent since February 2009, which shows a growing demand for investment property.
Increased confidence in the market
The financial crisis caused uncertainty of the risk for both buying property and borrowing from lenders with home buyers and investors alike sitting on the fence waiting for a safer time.
Since February 2009, financial markets have slowly improved and investors are finally making a comeback. With the recent spout of rate hikes, home buyers are being put off from purchasing homes and the first home buyer market has dropped after incentives were cut, but investors have more confidence in the market, with many seeing this as an opportunity as they borrow more, hence the increase in the take-up of investment home loans.
As interest rates rise many home buyers are turned off purchasing new homes and investors are seeing this as an opportunity as the demand for rentals is increasing,” says Damian Smith, RateCity’s CEO.
“This new wave of investors must be careful when choosing an investment home loan because your mortgage deal can be the difference in making a good return on your purchase.”
Get the most out of your investment loan
If you are in the market for an investment property, here are some tips on what to look out for when choosing an investment loan:
Interest rates: When rates were lower investors were more commonly choosing a fixed rate because it is helpful to manage expenses with a set repayment. But with the current market of competitive variable rates, more are choosing variable. To find a home loan with a great interest rate, compare online at RateCity.
Construction loans: A construction loan is great for borrowers financing a building project or planning to renovate before reselling. Unlike other loans where you can access all of your funds, a construction loan can provide smaller lump-sum payments during various stages of the property being built. That way you aren’t paying the builder for the work they have not yet completed.
Interest-only loans: This type of loan could suit short-term investors as you pay only the interest. When you choose to pay out the loan usually after selling, you then pay the balance as a lump sum.
This type of loan allows investors to purchase property with a limited cash outlay and investors may receive tax benefits through negative gearing. It is also helpful to manage expenses with a set repayment. This is not recommended for long-term property investors because you are essentially relying on the value of the property to increase faster than how much you have paid in interest.
Mortgage portability: This is the ability to transfer your loan to another property. A portable home loan allows you to sell one property and move it to a new one without having to refinance, which may save you on legal and application fees.