What Features Does Your Investment Loan Need?
If you are thinking about investing in property for the first time, no doubt a lot of your thoughts will centre on investment loans.
How you finance your purchase is a critical part of ensuring your investment generates healthy returns.
Each buyer is different and their loan should reflect their individual needs.
The more you know about loan features and structure options, the more confident you can be when deciding how to finance your investment.
Here are some features to consider.
With interest-only loans, you just repay interest (rather than interest and principal) for a fixed period of time at the start of your mortgage.
This means you can free up some cashflow at the start of your loan – anywhere from one to five years, as a rule.
If you are a property investor, this could be very helpful, particularly if you wish to renovate a property and then benefit from the capital gain by selling in the short term.
You could also use this period to make extra repayments to the mortgage for the home you live in.
Once the interest-only period has finished, the loan will revert to standard interest-plus-principal payments.
Line of credit loan
A line of credit or home equity loan uses the equity you have built up in current property to set up a withdrawal facility which acts much like a credit card.
This lets you have access to funds as you need them, and you are only charged interest on the amount you choose to use.
A line of credit loan may be a good solution for you if you have already built up a decent amount of equity in your home.
As well as being useful for investing in property, home owners often access their equity in this way to fund other purchases, such as cars, holidays and home improvements.
An increasingly popular type of loan is one that pairs a mortgage with a transactional, or offset account.
The reason why this is so popular is that money stored in this account is offset daily against the balance of your loan. This means you get charged less interest the more savings you have.
By keeping a decent amount of money in your offset account you could save significantly on interest and take years off your loan.
For instance, you could have your salary deposited straight into your loan offset account, or make it the priority destination for bonuses, tax refunds or other unexpected windfalls.
Split home loan
With a split home loan you can get both the security of a fixed rate and the benefits of a variable one, or another combination that suits your needs.
This could be a good option if you can't decide whether a fixed or variable rate will be better.
By combining the two, you could benefit from being partially protected from fluctuations in interest rates and yet still benefit from lower repayments when rates decrease.
By opting for an investment loan with a redraw facility, you can benefit from having extra money on hand should you need it after you make extra repayments on your mortgage.
Anything you pay back on your loan that is in excess of your minimum monthly repayment is of course helpful because it can reduce overall interest charges and the length of your loan.
With a redraw facility, you get the added benefit of being able to redraw these extra repayments if necessary.