updated 15th October 2016
Investor loans and owner-occupier loans are essentially the same product
– one is being used to buy an investment property that will be rented out and the other buys you a place to live in.
Unlike owner-occupier loans where borrowers can borrow the whole amount of the property, lenders will usually approve a lower proportion of the loan for investments in relation to the value of the property. The loan to value ratio (LVR – the proportion of loan you take against the value of the property) is typically capped at 90% LVR for investor loans.
However, thanks to the ongoing innovation in the mortgage market, some lenders are now offering full funding. First Permanent’s Investor Loan Plus, which can be stretched over a 50-year term, is an example. “No one’s ever seen that type of loan in this country before,” says Ian Grant, CEO, First Permanent. “We’ll lend you the full purchase price of the property, plus we’ll lend you all the stamp duty. We’ll also do interest-only or fixed for three years.”
Spoilt for choice
The types of loans available for investment purposes are similar to what’s available for owner-occupiers. You’ll be able to get fixed, variable, fully-featured or basic loans as an investor loan – and you choose depending on your preferences and needs.
“Interest rates, costs and types are all the same,” says Gino Marra, CEO, Carrington International. “The only difference is that some lenders require a higher amount of equity for an investment.”
Most investors take an interest-only loan, as the property is an investment that will most likely be sold at some point, rather than a family home where you want to pay the debt off.
Interest-only loans allow you to reduce your monthly repayments so you free up some of your capital that could be better used elsewhere. This enables you to maximise your cash flow and boost your ability to service the loan. Paying interest-only also helps you simplify your paperwork when you work out the deductions as you can only claim a tax deduction on the interest portion of the loan repayment.
One thing to remember, though, is that because you’re only paying interest, you’re not reducing the principal on your mortgage. So at the end of the interest-only period, you still owe the original borrowed amount.
Investor loans can be structured in different ways depending on your current financial situation.
This involves taking a separate loan from your home loan. You can choose to take the investment loan out as a completely standalone product, but you’ll generally need a deposit, as it can be difficult to secure the full purchase price of an investment property – it’s more difficult than it would be as an owner-occupier.
The main advantage of this strategy is that you’ll only use one investment property as collateral so there’s less risk for you. However if you default, the bank can still technically sell any or all of your other properties to recover the money they’re owed.
The most common method of securing an investment loan is to use the equity in your existing property. Also known as cross-collateralisation, this involves borrowing against the equity in your existing residential or investor properties, using your existing assets as security for the new investment loan
This allows you to borrow much more to finance your purchase, possibly in excess of 100%, depending on the size of the equity you have available.
Lenders tend to be keen because it decreases their risk, while it gives borrowers the ability to make purchases they otherwise wouldn’t be able to afford.
Both loans might be under the same facility, similar to an umbrella loan, or they might be separate. The drawback here is that the new loan creates a charge over your existing property, so that you could lose the property if repayments aren’t made. It also means that you must have the loan agreement in place before going ahead with the investment purchase, so you lose some flexibility.