Borrowing to invest in property is big business in Australia, with investment home loans making up around one-third of the value of all home loan commitments each month, according to ABS data.An investment home loan is a home loan for people looking to buy property with the intention of renting it out and profiting through a rise in the property’s value. Investment home loans are different to the home loans you might use to buy a house or unit to live in – those are known as ‘owner-occupier’ home loans. Compared to owner-occupier home loans, investment home loans often have higher interest rates and may have stricter eligibility requirements. But as with any major purchase, you can save on an investment home loan by doing your research and shopping around.
How can you save money on an investment home loan?There are basically five key ways you can save on an investment home loan:
- Look for a loan with a good value interest rate
- Check what the fees are
- Seek out helpful features like an offset account
- Look to make more frequent repayments
- Claim your entitled tax deductions
We said before that investment home loans tend to come with higher interest rates – this is partly because property investors are generally considered to be riskier borrowers than owner-occupiers. It’s also because APRA (The Australian Prudential Regulation Authority) recently had a growth cap imposed on the amount of investment lending that ADIs (Authorised Deposit-taking Institutions) could conduct, however, this cap was lifted in July 2018. But if you spend the time to do some research – and you should if you’re taking out a home loan – you’ll see that there are still home loans out there for investors with rates below 4%. Loans.com.au’s home loan repayment calculator shows that the difference between a 4% and a 5% interest rate on a $500,000 home loan is over $300 per month and $100,000 over 30 years. That difference speaks for itself really.
Just like a regular home loan, investment loans can sting you with fees if you aren’t careful. These fees can be anything like:
- Upfront fees (the fee charged for assessment and taking out the loan)
- Ongoing fees (charged by lenders for continuing to provide the loan)
- Exit, break and discharge fees (fees charged when the loan ends or when you switch to another lender)
So when comparing investment home loans, don’t just look at the advertised interest rate – consider the fees as well. Keep in mind that upfront and ongoing fees are factored into a loan’s comparison rate, which every law-abiding lender must display beside the advertised rates of their products. So if you see a loan with a low advertised interest rate, but a relatively high comparison rate, it probably has high fees to make up for the lower interest rate.
Home loan features such as offset accounts and redraw facilities can help borrowers save on their interest costs. However, property investors may favour an offset account over a redraw facility because an offset account operates as a separate facility to the investment loan, unlike a redraw facility. This means that withdrawing funds from the offset account for personal (non-investment) use does not distort the loan’s purpose (investing), maintaining the tax-deductibility of the loan. For example, using a redraw facility to withdraw $50,000 from a $500,000 investment home loan to renovate your owner-occupied home could result in the ATO deeming the investment loan to be only 90% tax-deductible. There is no risk of that with an offset account. Home loans with offset accounts often have higher interest rates though, so borrowers should consider whether they’d actually utilise one.
While monthly repayments might be the default option you’re given, making repayments fortnightly or even weekly can help you save on interest and pay off the loan earlier, so long as the value of these regular repayments are at least half (fortnightly) or a quarter (weekly) of your monthly repayments.
The Australian Taxation Office (ATO) lists several investment expenses that investors can claim a tax deduction on, such as:
- Interest paid on the loan
- Home, contents and landlord insurance
- Maintenance and management costs
- Council rates and construction costs
- Depreciation of the property’s value
- Travel expenses to the property in order to carry out inspections or maintenance
You should speak to a registered tax agent about the tax implications of buying an investment property.