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What is an investment loan rate?

Investment loans are a lot like other home loans, except you won’t be living in the property you buy. Like other types of home loans, it’s important to compare investment mortgages in order to find an option with features and benefits that suit your needs, such as an affordable interest rate.  

However, it's not always easy to secure an investment home loan with a very low interest rate. Comparing the available mortgage rates for investor home loans with the features and benefits they offer may be able to help you select a loan that provides better value in your situation.

How does an investment loan compare to other mortgages?

Investment loan rates may be higher than the interest rates for similar owner-occupier home loans, due to the greater risk involved. This means it’s important to compare interest rates, fees, features and benefits of different investment mortgage options, to ensure you choose one that suits your needs.

Two loan types that are popular with investors include:

  • Interest-only investment loans: For a limited time, your mortgage payments will only cover the interest charges and won’t reduce the amount you owe. This can help keep your repayments more affordable until the interest-only period expires and the loan reverts to principal & interest repayments. Keep in mind that while interest-only repayments may cost you less in the short term, an interest-only period can mean it takes longer to pay off your investment property, costing you more in total interest charges over the life of the loan. 
  • Line of credit: A mortgage where you can use your equity in the property as security to borrow money. This line of credit works similarly to a credit card with a higher limit, so you can borrow and repay money as you need it, only paying interest on what’s currently owing.

Before you apply for one of these loans, or other investment options, be sure to consider the features and benefits, as well as the interest rates, fees and other charges, and think about which repayment types and other options may provide the most value in your situation.

Owner occupier vs investment loans

Most mortgage lenders consider owner-occupier home loans to be less financially risky than investment mortgages. After all, an owner occupier has a vested interest in keeping up with their principal and interest repayments in order to keep a roof over their head, and to make progress towards owning their home outright. This means that lenders tend to offer lower interest rates and lower fees to owner occupiers.

Investors use the properties they buy as assets to generate wealth, either through rental yields or capital gains. However, it’s not guaranteed that a property will increase in value, or that tenants will always be available to pay rent, so an investor may not always make money from their investment. Additionally, investors may choose to minimise the mortgage repayments on their investment property in order to enjoy tax benefits, such as negative gearing. Thus, lenders often charge investors higher interest rates to help make up for the higher risk of potentially defaulting on their mortgage repayments.

However, investor mortgage offers are more likely to offer flexible features that could better suit investment properties. For example, an investment mortgage is more likely to offer flexible repayment options that could help allow investors to better manage the rental yields from their investment property.

How to get a low interest rate on an investment loan

Most banks and other mortgage lenders offer their lowest interest rates to the most secure borrowers. The lower the risk that you’ll default on your repayments, the lower the rates you may be offered.

Because investment loans are often considered riskier than owner-occupier home loans, borrowers may need to fulfil strict eligibility criteria to enjoy some of the lowest interest rates.

To help improve your investment loan application’s chances of being approved, think about the following:

  • Try to save a large deposit: Many home loans, including investment loans, require a deposit of 20% or more of the property's value to avoid being charged for Lender's Mortgage Insurance (LMI). Some investment loans also require larger than average deposits or equity as part of their lending criteria. Generally, the lower you can make your loan to value ratio (LVR), the lower the interest rate you may be offered.
  • Check your credit score: If you have bad credit, it may be harder to successfully apply for an investment loan. You can check your credit score for free, and consider ordering a copy of your credit report to see if there are any errors that can be corrected. Plus, comprehensive credit reporting means that positive credit behaviours such as paying off other outstanding debts may help improve your credit score.
  • Compare investment loans from different lenders: As well as comparing interest rates, look at the fees, features and other benefits. Consider which investment mortgage options may offer the most value in your financial situation, and check their lending criteria to see which ones you’re most likely to qualify for.
  • Ask for help: Consider contacting a mortgage broker for assistance selecting and applying for an investment loan. Brokers may be able to negotiate with lenders on your behalf to get you a lower rate, and may have access to special mortgage deals that aren’t normally advertised.

Remember that even if your investment loan doesn't offer the best interest rate for you today, you may be able to refinance your investment mortgage down the track after your financial situation has changed, and select a loan that better suits your circumstances.

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Can an owner occupier get an investment loan rate for a live-in property?

Owner occupiers likely won’t be eligible for most investor mortgages, as these home loans involve a different kind of risk from the lender, and typically have different eligibility criteria. This means that as an owner occupier you may not be able to benefit from some of the flexible mortgage features that are more often offered to investors.

However, owner occupiers can often qualify for home loans with lower interest rates than many property investors, as you may be considered a safer lending prospect.

Can a broker get you great investment loan rates?

A professional mortgage broker can help you find the best loan options for your financial situation, personal goals, and investment strategy. They may also have access to special investment mortgage deals that are exclusive to brokers. A broker can also negotiate with a lender on your behalf, so if you can show that you’re a good borrower, you may be able to enjoy a cheaper interest rate on your investment mortgage, whether you're investing for the first time or refinancing.

Talk to a broker to get an investor rate ideal for you

What rates can you get on an investment loan?

As with owner-occupier mortgages, you can choose an investment loan with:

  • a variable interest rate, which may rise or fall over time, making your loan repayments cost more or less;
  • a fixed rate, which lets you enjoy consistent repayments during the fixed rate period, or;
  • a split rate, where you pay a mix of variable and fixed interest on your mortgage.

It’s important to remember that the best investment loan for you may not be the one with the lowest interest rate. If you compare different loan products, you may find a fixed rate home loan or variable rate home loan with features and benefits that offer you extra value, as well as affordable home loan interest rates.

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How do you compare investment loan rates?

One of the best ways to compare investment loan rates is to utilise comparison tools, such as tables, calculations and comparison rates.

  • Comparison tables allow investors to compare apples with apples. You are able to filter down your options based on personal details, such as investment loan amount and deposit size. The comparison table will then show you a range of options that suit your search result, and places them side by side so investors can clearly view how the loans compare. Investors are also able to view potential fees and features that may be on offer.
  • Consider the features and benefits of different investment loans, and whether they offer you value in your financial situation. For example, an investment loan that includes options for extra repayments, a redraw facility, and an offset account may provide more flexible repayments, but you may also be charged a higher interest rate and fees than a more basic investment loan. 
  • A mortgage repayment calculator is a helpful tool to help investors further compare investor loan rates. Once you’ve narrowed your search down to a few loan options, you can use the calculator to see how the repayments may differ based on the loan advertised rates and fees. As keeping costs low is important to investors, this technique may help you to see which investment loan option best suits your financial needs.
  • Comparison rates combine the advertised rate with ongoing fees to give investors a better idea of how much a loan may cost. Keep in mind that it is based on a loan size of $150,000 with a loan term of 25 years, which is understandably much smaller than the average loan size in Australia nowadays. So while comparison rates can be a helpful tool for comparing investment loan rates, as they paint a more realistic picture of the real cost of a mortgage, it is still recommended you use tables and calculators to further narrow down your own search.

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Is a second mortgage tax deductible?

If you take out a loan to invest in a property, you can claim a tax deduction on the interest you pay as long as the property is earning income. In other words, if you rent the property for the entire year, you can claim a tax deduction for 12 months of interest payments. But, if you use the home for six months and rent it for the other six months, you can claim deduction only for 50 per cent of the interest amount.

You also get tax benefits for items that lose value over the years. But, the entire amount is not allowed as a tax deduction in the same year; instead you’ll have to claim a portion each year over a number of years. 

Additional borrowing costs, such as maintenance fees, stamp duty, offset account setting up fees, Lenders Mortgage Insurance (LMI), and establishment fees, can also be claimed as tax deductions.

Before you claim second mortgage tax deductions, it’s often worth checking with an experienced tax expert.

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

Do first-time home loan applicants qualify for tax benefits?

If you’re a first-time homebuyer applying for a home loan, you could qualify for some tax deductions, but only if your property is a source of income for you. For instance, if you rent out the property, you could get tax deductions on the cost of constructing or renovating it, the loss in value of depreciating assets such as furniture or electrical fixtures, and the home loan interest. 

Homeowners using their property as a residence could also get a tax deduction if a part or all of it is used for business. These deductions include tax write-offs for depreciating assets and deductions for operating expenses like utilities’ payments and service charges for phones and the internet. However, people running businesses from their residences don’t qualify for a tax deduction on the interest paid on their home loans.

What is a mortgage rate?

The interest rate on a home loan is sometimes called the mortgage rate. This percentage indicates how much interest the lender will charge you with each home loan repayment. Your interest rate is effectively the “cost” of “buying” the money you’re using to buy a property – the higher your mortgage rate, the more your home loan repayments may cost.

Using a home loan calculator, you can estimate how much your home loan repayments may cost, based on your mortgage rate, loan term, and loan amount. This may also be affected by whether you’re making principal and interest repayments or interest-only repayments, if you have a fixed rate or variable rate mortgage, and any fees and other charges that may apply.

Is the lowest home loan rate always the cheapest?

The home loan with the lowest interest rate may not always be the cheapest mortgage option for you. Sometimes a home loan with a low interest rate may charge high fees, which may cost more in total than a mortgage with a higher interest rate and no fees.

Consider checking the comparison rate, which combines interest and standard fees, to get a better idea of the overall cost of different home loan options.

Fact Check Verification

The information on this page was fact checked by Chris Brown, a broker in New South Wales specialising in home loans, car financing, debt consolidation, short-term finance, non-conforming finance, business finance, and asset financing. For more information on how brokers like this can assist you, look for a broker near you