Compare investment home loan rates

The RBA held the cash rate at 4.10% in July, despite the majority of the big four banks and a raft of economists suggesting we were in for another rate hike.

Many investors and would-be borrowers may be nervously wondering how high will home loan rates go?

Investors hoping to avoid increasingly high rates could instead choose to lock in an affordable fixed rate now.

Australia, like most of the rest of the world, seems destined to encounter some form of economic hardship and a spell of weak growth. Will Australia enter into a recession, and to what extent will this forecast slump affect consumer confidence and household debt?

Thinking about investing but unsure where to begin? We've created the ultimate beginners guide to investing, covering all the basics, including where to invest, how to invest, and how to prepare for your first investment.

Updated by Peter Terlato on 5 July, 2023

Many Australians use a mortgage to buy the home they live in, making them owner occupiers. But if you use a mortgage to buy a property that you rent out to tenants, you are a property investor.   

Investor home loans are more likely to have features and benefits that are useful to property investors, such as an offset account, additional repayments, a redraw facility, or the option to make interest-only repayments for a limited time. However, they’re also more likely to charge higher interest rates and fees, and may have tighter lending criteria.

Investors can use the properties they buy as assets to build wealth, either by earning rental income or through capital appreciation. Investment 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 investors better manage the rental yields from their investment property.

However, most mortgage lenders consider investment mortgages to be riskier than owner-occupier home loans. After all, an owner occupier has a vested interest in making principal and interest repayments to keep a roof over their head, and to make progress towards owning their home outright.

Meanwhile, there is no guarantee that an investment property will consistently increase in value, nor that tenants will always be readily available to pay rent. As a result, an investor may not always realise profits from their investment.

Additionally, investors may choose to minimise the mortgage repayments on their investment property 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.

All of this means that lenders tend to offer lower interest rates and lower fees to owner occupiers.

Two special 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 on the loan and won’t reduce the principal amount you owe. This can make 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 over 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 high limit - 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 any other investment options, be sure to consider the features and benefits, as well as the interest rates, fees and other charges you're likely to incur. Don't forget to weigh up repayment schedules and other options to extract the most value for your situation.

The process of getting an investor loan is broadly similar to getting a home loan as an owner occupier – you fill in similar forms and provide similar information about your income, expenses, assets and liabilities. However, there are some important differences between applying for investment home loans and applying for owner occupier home loans to be aware of.

Just like when you apply for an owner occupier home loan, you’ll need to pay a deposit on an investor mortgage. However, it’s often harder to find low-deposit investor loans, and much more likely that you’ll need to pay an upfront deposit of 20% or more of the property’s value as part of the eligibility criteria. This deposit can be covered by your savings, or by the value of equity you already own in a property. Investors may also have to pay stamp duty, depending on any exceptions or concessions in your state, so keep this additional cost in mind. 

Investors will need to provide evidence that they earn enough income from their employment to cover the cost of mortgage repayments. Other sources of income, such as rents from other investment properties, may only be partially included when calculating your income, as these income streams are typically less consistent than your wage or salary. Banks may not include the income you hope to receive from rent on your investment property, as they’ll want to be confident you can still afford the loan even if the property is untenanted for any reason.

You’ll also need to provide details of any other debts or lines of credit, such as car loans or credit cards. Because banks often consider investment home loans to be riskier than owner occupier home loans, your lender may pay close attention to these potential liabilities, which could affect your borrowing power as an investor.

Getting the best interest rate as a property investor often requires you to demonstrate that you’re a reliable borrower. The less risk you represent to a lender, the more likely you are to be offered a lower interest rate on your mortgage. This is also true for owner occupiers.

The larger a deposit you can afford on your mortgage, the more likely you are to be offered a lower interest rate. If you already own another property, you may be able to use your equity in place of saving up a deposit.

You’ll typically need to pay a deposit of 20% or more of the property’s value. Any less than this, and you’ll need to pay for a lender’s mortgage insurance (LMI) policy, or get help from a guarantor to secure your mortgage with the value of equity in their own property. This is sometimes called having a loan to value ratio (LVR) of 80% or less. 

It’s important for property investors to compare investment loans from different lenders, instead of just sticking with their current bank. There are many banks and mortgage lenders to choose from, each with a variety of investor loan options to consider. You may be surprised by the rates that are available from different lenders.

The more features and benefits a mortgage offers, the higher its interest rate may be. While an investor loan with options such as interest-only payments and an offset account may appeal to you, you may also find that a more basic “no frills” investment loan with a lower interest rate offers you greater value.

A mortgage broker may be able to help you find lower investment home loan rates. Some brokers have access to exclusive mortgage deals that aren’t normally advertised and can negotiate with lenders on your behalf to help you get an even better deal for your financial situation.

Try to save a large deposit

Many investment loans require larger than average deposits or equity (e.g. 20%, 30%, or even 40%) 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.

Present a strong loan application

Prepare a thorough loan application that demonstrates your financial stability and investment plans. Provide evidence of your income, employment history, assets, and a well-researched investment strategy. A strong application can make you more attractive to lenders and may lead to better interest rates.

Check and improve 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 of different investment mortgage options. Once you have an idea of which ones offer the most value in your financial situation, 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.

Return on investment

The ultimate goal of investing in real estate property is to enjoy a return above the original investment. There are two main ways to achieve this:

1. Rental property income: The money your tenant pays you, usually monthly, to live in your property. Also known as earning a passive income.
2. Capital growth: The increase in value of your property over time. If your property sells for more than what you bought it for, you have achieved capital growth. For example, if you bought a unit for $600,000 and later sold it for $750,000, your capital growth would be $150,000.

Less volatility

While no investment is ever 100% safe, the property market is generally less volatile than other investment options, such as the share market, which can rapidly lose value due to circumstances beyond the investor’s control.

Property transactions are also generally slower than share market transactions, so they can be more carefully considered.

Intergenerational wealth transfer

Some families make property investments to bestow wealth upon their beneficiaries through these bricks and mortar assets.

Tax benefits

Property investors may be eligible for a few tax benefits, including capital gains discounts, capital gains offsets, deductions for repairs and maintenance if the property is tenanted, and negative gearing tax deductions, all of which can affect your taxable income. Contact the ATO and/or a tax accountant to learn more.

Negative capital growth

Not all property markets rise and there is a risk that your investment may not yield the results you expect. This risk may be more pronounced in areas that are exposed to boom-and-bust sectors such as mining, and property prices may not yield a positive result.

Costs outweigh return

Sometimes property investors have to spend a lot to prepare their investment property for tenants, or to help improve the property’s value for sale. These costs may include maintenance costs, and could outweigh the return you receive on your investment if they do not improve the property’s capital growth or rentability.

Unable to sell or lease

If your investment property doesn’t appeal to buyers or renters, you may not receive a return on your investment. Vacancy rates can make a serious impact on property investing, and you may see a big difference in the results when real estate agents are unable to find tenants who can supply you with rental income.

Unlike when you buy a property as an owner-occupier, an investment property does not have to match your taste or even be located in an area where you’d like to live. However, there are other factors to consider, including:

• Growth factors: Have property values in the local area increased or decreased in recent years? While past performance does not guarantee future performance, this can give you a better idea of what you could expect from your investment.
• Economic factors: Is the property located in an area exposed to one industry? If so, is that industry growing or declining?
• Social factors: Is the area appealing to potential renters? Does it have good public transport infrastructure? Is it close to schools and medical facilities?

Paying only the interest charges on your home loan appeals to many property investors. This repayment strategy can help keep your monthly costs down, relieve pressure on your finances, and help make your budgeting a little bit simpler. 

You can typically only make interest-only mortgage payments for a limited time before the loan reverts to principal and interest repayments. Once your loan reverts to paying principal and interest, your repayments will cost more from month to month. And once you’ve fully paid off the loan on your investment property, you may find you have paid more in total interest on the loan than if you’d been on a principal and interest loan from the start.

Some property investors use interest-only home loans to deliberately avoid paying down their home loan principal, as they’re not really interested in owning the property outright one day. Instead, they minimise their mortgage payments to maximise their rental yield in the short term, and wait for the property to increase in value over the longer term. This capital growth may allow the investor to sell the property for more than they bought it for, or they could use the equity to refinance their mortgage, or even apply for a second loan on another investment property.

There are risks involved with interest-only loans, especially when they’re used to pursue a property investment strategy. Consider contacting a mortgage broker before you enquire about an interest-only loan.

Owner occupiers likely won’t be eligible for most investment 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 property 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.

An investment home loan isn’t something to simply set and forget. Even if you don’t get the best home loan available when you first buy your investment property, you’ll still have the option to refinance your loan in the future. This may let you get a lower interest rate, access more useful features or benefits, or switch to another lender whose customer service you prefer.

You can check your home loan interest rate and compare alternative options in the market as often as you like, though you don’t need to stress about it daily. There are no rules around how often a borrower should look into refinancing their home loan, though previous studies have found that many Australians look seriously at refinancing after five years.

If you couldn’t afford a 20% deposit when you first bought your investment property, and had to pay LMI or get help from a guarantor, you may want to wait until you’ve built up at least 20% equity in your property before you think too hard about refinancing. Having equity available means you won’t have to pay LMI a second time (refinancing effectively means taking out a new loan, and LMI is not transferable), and having 20% equity or more as security may make it easier to qualify for lower home loan interest rates.

You may want to check if your interest rate is still competitive when there are changes in Australia’s economy, such as when the Reserve Bank of Australia (RBA) adjusts the nation’s cash rate. It’s also often worth checking your rates when your lifestyle or finances are changing, such as if you change jobs and income, or if you have children. A change to your circumstances often means a change to your finances, which may mean your interest rate also needs to change.

Keep in mind that when you refinance your investment loan, you may need to pay fees and charges when you switch lenders. It’s important to compare the cost of refinancing to the potential value you could enjoy from lower rates and see how long it would take for the savings to outweigh the costs.

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.

To compare mortgages for investing in property at RateCity, start by looking at one of our rate tables. To make sure you’re only seeing home loans that are suitable for investors, select that you’re looking for a loan to invest in property, or open the Filters and select that you are an Investor.

The rate table will show you a selection of investment home loans, starting with those that have an option to View Now or Enquire Now, putting you directly in touch with the lender. To see even more investment mortgage choices, use the Filters and select Include All Products.

You can use the Filters to further narrow down your search options, such as by entering:

• how much you intend to borrow;
• the value of the property you're buying;
• your preference between a fixed or variable interest rate;
• your preference between principal and interest or interest only repayments;
• your location, and;
• what home loan features and benefits you’d like to see included, such as offset and redraw.

Once you’ve filtered the table to show a shortlist of mortgage lenders, you can compare their interest rates, fees, features and benefits side by side. The comparison rate combines the cost of a home loan’s interest and standard fees, to give you a better idea of its potential overall cost. You can also check the Real Time Ratings™, which combine a loan’s cost and flexibility into a simple star rating. Real Time Ratings™ results are calculated as you use the site, making them as up to date as possible.

If you find a mortgage offer you’d like to apply for, you can click View Now or Enquire Now to instantly contact the lender, or More Info to read through its details. You can also contact a mortgage broker who may be able to help you choose a suitable home loan, manage the application process, and more.