Home loans
Compare interest-only home loan rates
By Sean Callery
Which lenders are more likely to approve your investment loan?
According to banking regulator, APRA, Australia’s biggest 10 banks lend twice as much to owner-occupiers as they do to investors. But some banks have more of a preference for investor loans.
Macquarie Bank shows a notable swing towards investment loans, making up 38.52% of its property lending. By contrast, ING shows a strong preference for owner-occupier loans, with only 16.27% of investment loans on its book. Of the big four banks, NAB has the highest proportion of investment loans.
Regional banks (e.g. Bendigo Bank) tend to have a more conservative approach to investor lending.
Peter Drennan, Money's Research & Data Expert
“The data shows that each lender has a preference for loans, and are likely actively balancing their loan book using rates to entice new customers. It also shows that your best loan option for an investor loan might not be your best option for an owner occupied loan; so it pays to shop around based on the loan type, even if you already have a loan at a specific lender.”
Peter Drennan, Money's Research & Data Expert
Types of investment home loans
Interest-only vs principal & interest investment loans explained
Principal & interest (P&I) home loans
This is the ‘standard’ way to pay off a loan. You make repayments to reduce your loan balance (the principal) AND to cover the interest charged by the lender. Your loan principal reduces over time and your equity increases.
Your repayments are higher than they would be if you were to choose interest-only repayment. But, you’ll pay less interest overall.
Only the interest component of a P&I loan is tax deductible.
Interest-only investment home loans
With an interest-only home loan, your repayments only cover the cost of interest charged by the lender for a period of time (1-5 years). This means lower repayments initially, but the loan will eventually revert to higher repayments later on when the principal also needs to be repaid.
Having lower payments initially means property investors have more cash available for other investments, and the payments may be fully tax deductible.
You’ll pay more interest overall.
Should you get an interest-only investment loan?
Investors tend to go with interest-only investment loans to reduce their initial mortgage repayments and free up cash flow.
Instead, the hope is that the borrower's equity in their investment property will grow due increases in the property's value. This would potentially allow the investor to release equity by refinancing to purchase another property.
But this can be risky as there is no guarantee that your property’s value will increase.
As an investor, you may also be prepared to tolerate higher interest costs in the short term because interest payments on your investment loan may be tax deductible. This could help offset the rental income earned.
Investors need to think about their loan 'exit strategy'
Mansour Soltani, Money's Home Loans Expert
“If you’re considering interest-only, you need to know what your plan is for actually paying down the debt. Some people with more than one investment property will sell one of their properties to pay off the other debt on the others, but what if you only have one investment property? Speak to your accountant or financial advisor to discuss your exit strategy.”
Mansour Soltani, Money's Home Loans Expert
Fixed versus variable investment loan rates
Investment loan rates can be either fixed or variable:
Variable rate investment loan
If your investment loan rate is variable, it could go up or down at any time, and so too would your loan repayments. The potential upside of a variable rate loan for investors is it’s more likely you’ll have access to loan features like an offset account, plus the flexibility to repay the loan early without penalty fees.
Fixed rate investment loan
Your interest rate and home loan repayments will stay fixed for a set period of time (between 1-5 years). This means you won’t be impacted if interest rates go up or down. A fixed rate loan may appeal to investors looking for certainty – for example, knowing your rental income will be sufficient to cover the loan repayments during the fixed rate period.
Split rate loan Most lenders also offer the option of a split rate loan which means part of your loan is on a fixed rate and part is variable. Investors who choose a split option can decide what portion of their loan they want to fix and how much will remain on a variable rate – 50/50, 60/40, 70/30, etc.
Other types of investment loans
There are also more specialised investment loan products:
Self-managed super fund (SMSF) property loans
These are loans specifically designed for investors purchasing a property through a self-managed super fund (SMSF). The requirements for getting an investment mortgage through an SMSF are more complex than standard loans, but they can be appealing to some investors.
“With an SMSF loan or family trust loan, the banks don't take into consideration anything that's sitting outside the fund or trust” explains Mansour Soltani, Money.com.au's home loans expert.
“This works in reverse too, meaning if you plan to make further personal investments in future, the SMSF loan will not impact your borrowing capacity.”
‘Green’ investment property loans
A limited number of Australian lenders (e.g. Commbank, loans.com.au & Gateway Bank) offer specialised investment loans for certified energy-efficient homes.
These usually have a discounted interest rate compared to the lender’s standard investment loan rate, but the eligibility criteria for these are usually quite strict. For instance, you may be required to install approved clean energy products, such as solar panels or energy-efficient window treatments.
Line of credit investment loan
Investors with an existing property may be able to borrow extra funds for renovations or other investments by taking out a line of credit that’s secured by their existing property. This gives you ongoing access to credit up to a limit (like a credit card). Interest is usually only charged on funds drawn down.
Offset account versus redraw on investment loans
For investment loans, a redraw facility and offset account both allow borrowers to save on interest using any excess cash, while still maintaining access to that cash. The average home loan interest rate is higher for investors, making these features particularly appealing.
Here’s how they each work in a nutshell:
Offset account
Your home loan has a linked transaction account, the balance of which ‘offsets’ what you owe on your investment loan and the interest charged on it.
Redraw facility
Allows you to make extra repayments on your investor loan and then withdraw that money again if you need it.
Mansour Soltani, Money's Home Loans Expert
“Most investors prefer an offset account because of the tax implications. Basically an offset account allows you to withdraw funds from your home loan for personal use, without it impacting any interest tax deductions. On the other hand, accessing money through redraw may limit your ability to claim tax deductions. Always speak to your accountant or financial advisor to fully understand the tax implications based on your situation.”
Mansour Soltani, Money's Home Loans Expert
How to compare investment home loans
1
Interest rate
Interest will be the main cost of your investment loan. While interest costs may be tax deductible for some investors, a competitive interest will reduce your overall investment costs and free up cash to use or invest elsewhere.
2
Fees
Like interest, loan fees may be tax deductible depending on your situation, but unless you’re getting something valuable in return for paying the fee (like access to an offset account), they’re generally best avoided.
3
Your LVR
For example, what’s your lender’s maximum loan-to-value ratio (LVR) for investment loans? Some banks will accept a 90% LVR or more. Others prefer a standard 80% LVR. Lenders use your LVR to assess the risk of a loan. To access the best investment loan rates, you generally need to be borrowing less than 60% of the property’s value (i.e. 60% LVR or lower).
4
Repayment flexibility
Being able to pay out the loan early without penalty can be valuable, particularly for investors who plan to repay the loan early (e.g., if you sell your property). Repayment flexibility can also be useful for investors who experience an unexpected financial windfall, such as bonuses or dividend payments. This flexibility allows them to reduce their debt without penalties.
5
Loan structure
For example, do the loans you’re comparing offer an interest-only option, or the ability to split the loan between a fixed and variable interest rate? Structuring your loan correctly is crucial for investors as it can optimise your cash flow, tax benefits, and overall financial strategy, according to Mansour.
6
Useful loan features
A home loan with an offset account is a must for most property investors, according to Mansour. This allows you to reduce interest costs by keeping cash in a transaction account linked to your home loan and it doesn’t affect tax deductibility of your home loan interest.
How to apply for an investment home loan
Applying for an investment home loan is usually as simple as completing an application form with the lender and providing supporting information to prove you’re eligible, including:
- Proof of income (e.g. salary or rental income if you own other investment properties)
- Proof of expenses (e.g. bank statements)
- Proof of assets you own (e.g. any other property)
- Proof of liabilities (e.g. loan statements)
- Proof of identity
How to get your investment loan approved
Each lender has its own eligibility rules for investment loans based on how much tolerance it has for risk. But as a general rule, your chances of approval for an investment loan may be better if:
- You have at least a 10% deposit or equity in another property.
- You don’t have very high levels of existing debt relative to your income (debt to income ratio).
- You don't have major issues in your credit history, although even if you do, some lenders offer bad credit home loans.
- You’re buying a property in an area with high occupancy rates for rental properties.
- You’re buying the right kind of property (studio apartments can be an issue for some banks, according to Mansour.
- You apply with the help of a mortgage broker, particularly if you’re a first-home buyer investor, or your situation is complicated.
If you can't meet the eligibility criteria for standard banks and mainstream lenders, a low-doc home loan could be an alternative worth considering.
What tax deductions are available to property investors?
Tax deductible
- Interest on your investor loan
- Loan establishment & valuation fees
- Stamp duty charged on the mortgage
- Title search fees charged by your lender
- Costs (including solicitors fees) for preparing and filing mortgage documents
- Mortgage broker fees
- LMI
Non-tax deductible
- Your loan principal
- Stamp duty charged by your state/territory government (except in the ACT, where stamp duty is immediately deductible because property purchases are on a leasehold basis rather than freehold)
- Legal expenses including for the purchase of the property
- Borrowing expenses on any portion of the loan you use for private purposes
Source: Mark Chapman, Director of Tax Communication at H&R Block. Please seek advice from a qualified tax professional to understand what expenses may be deductible based on your circumstances.
Mark Chapman, Director of Tax Communication at H&R Block
“If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less. If the total deductible borrowing expenses are $100 or less, they are fully deductible in the income year they are incurred. If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment.”
Mark Chapman, Director of Tax Communication at H&R Block
