You might think one home loan is the same as the next, but property loans come with different features and structures. These could have a dramatic impact on the cash flow and returns associated with your investment property. While there’s no one best loan, choosing the right one for your situation could help you save money.
Loan structure: interest versus principal and interest
Your loan structure could have a significant impact on your return on investment.
You could have a principal and interest loan, which means you pay down the principal – the debt you owe on your mortgage – as well as the interest, which is what the bank is charging you for the loan. This is usually a fixed term loan, and the benefit is you’ll be paying down the loan to eventually own the property outright.
You could have an interest only loan, which means you’re paying only the interest component on the loan with each repayment. While you’re not working away at the principal, this type of loan lets you minimise repayments and maximise cash flow for as long as the loan stays interest only, which might be for only the introductory period, typically between one and five years.
Loan structure: variable versus fixed versus split
You could have a variable or fixed loan. A variable loan means you’ll be subject to interest rate changes and your repayments will reflect this. A variable loan could be ideal if you expect interest rates to go down. A benefit of this type of loan is it usually lets you make unlimited extra repayments so you can pay down your principal as quickly as you want. Some loans could come with introductory rates for a “honeymoon” period (for example, the first year) during which low rates apply.
On the other hand, a fixed loan allows you to lock in an interest rate for the first few years, usually one to five years depending on the terms. You’ll be charged the same interest rate for those first years. This could be ideal if you’re financing in a high interest-rate market. In addition, if you need to fix your cash flow in advance, this gives you the ability to do so. However, keep in mind you usually can’t make extra repayments with fixed rate loans.
Note: there’s a third type, the split home loan. This gives you the security of a fixed rate and the benefits of a variable home loan, so you might be able to take advantage of lower interest rates but enjoy lower repayments if rates do rise.
Offset account
Offset accounts are popular with investors because you can use them instead of your everyday bank account, and the money is accessible via EFTPOS and ATM facilities. The money you keep in your offset account is counted towards your principal, so you can reduce the interest charged while having the flexibility of a redraw facility. Note, this feature is not available with all loan types.
Revalue the property to access equity
Some property investors like to have the option of revaluing their investment property and accessing the equity. If your property achieves significant capital growth, you could have your lender approve the new valuation so your loan reflects the higher amount of principal (or equity) you now own. You could tap into this equity to buy another investment property.
Line of credit
Adding a line of credit facility to your investment property loan lets you access the equity you’ve built up in the property through a withdrawal facility. As with a credit card, you can use the funds when you need them and interest charges apply only to the amount you use. You can use these funds for emergency repairs and other costs associated with the property – or for any purpose you choose.
Option to choose repayment frequency
Standard home loans usually only let you pay monthly, but some types of home loans could offer the option of weekly or fortnightly repayments. If your tenants are paying weekly or fortnightly, you can choose to pay more often and end up saving more on interest over the long term.
We get it, there’s a lot of options (sometimes too many) and it can be overwhelming. We can help you understand your options and find a solution tailored to your needs.
