Buying a home to rent out is a popular long term investment in Australia. Generally, property is considered to be a relatively safe choice, especially if it is a long term investment. Itʼs a big decision that requires a lot of factors to be considered such as:
- Will the property be kept long term until paid off?
- Will the property be sold after just a few years in the hope that it will make a profit?
- Are there plans to renovate to add value?
- Is it a house or an apartment that is being purchased?
- And of course, the type of home loan....
There are a lot of different investment home loans available with a number of different lenders. Some Lenders have investment home loans with stricter eligibility criteria. Some may require a larger deposit than other home loans, and often incur a slightly higher interest rate. It is a good idea to have some extra funds available to cover potential costs or loss of rental income if the property is untenanted for any length of time. The trade-off is that the owner can claim associated expenses as tax deductions. As with other home loans, there is a choice between a few different types of loans.
Interest-only home loan
As the name suggests, with interest-only loans, you don't pay any off the principal. Lenders will usually allow this for a fixed time period which is usually five years. The downside to this home loan option is that there is no debt reduction, however if the property value increases over time, the equity in the property will go up. It is a popular option for those looking to invest for two main reasons:
- Their monthly repayments are lower
- Investors can get a tax deduction for interest-only payments but not for principal payments. They can use a strategy referred to as 'Negative gearing' where they put themselves in a situation so that the investment will cause a loss of income. In this case investors hope that they will make a profit from the capital gain (increase in value) over a period of years.
Variable interest rate home loan
This is a flexible home loan type where the borrower can pay extra and use a redraw account to draw out any extra money that has been paid into the loan. The downside to this loan is that interest rates will fluctuate depending on the current cash rate. So if the interest rate increases, so will the repayments. This is not usually a popular option for investors because the repayments are for principal as well as interest which cannot be used as a tax deduction.
Fixed interest rate
A fixed rate loan is often used by investors as it provides certainty of repayments. This can be beneficial because the rent payments on a property will be fixed during the lease term, and even if market interest rates rise, the rent cannot be raised until the lease expires. People can choose to fix their loan for a period of time. They can also choose to split their loan, where 50% is fixed and 50% is variable.
Most commonly, offset account are linked to variable loans. An offset account allows people to use their mortgage as a savings account. When people put money into their offset account, the balance on their mortgage reduces. This basically means that long term they will pay less interest on their loan.
Line of Credit
A Line of Credit allows people to use the equity that they have built up in their home loan as a deposit for an investment property.
Preston Finance and Insurance
If you are thinking about investing in Property in Cairns, contact Preston Finance and Insurance.
- We understand that buying an investment home can be a bit daunting at times.
- We can help you through the whole process and offer advice on the best loan type for your investment.
- We can simplify the whole process of looking at different lenders, home loans and interest rates.
Preston Finance and Insurance
1/15 Spence St, Cairns City QLD 4870
ph 07 4052 0750