Choosing the right loan for an investment property requires careful consideration of your financial goals, your budget, the property itself, and the terms of the loan.
When it comes to investing in property, the loan you choose can have a significant impact on your financial outcomes, including your ability to make a profit on your investment.
By carefully evaluating the different loan options available to you and selecting the one that best meets your needs and financial goals, you can maximise your chances of success.
HSBC Australia’s Head of Secured Lending, Rory McCotter, says when purchasing an investment property, planning is key, which means looking at long-term financial goals.
Assessing all your options is crucial when choosing a home loan. Picture: Getty
Here’s how to choose the right loan for your next investment.
1. Determine your budget
Before you start looking for loans, you should have a clear understanding of your budget. This will help you determine how much you can afford to borrow and what kind of loan terms you can realistically expect.
When determining your budget, Rory says it is important to take stock of all potential costs.
“Apart from the deposit, you should also consider the potential stamp duty costs, which can vary state by state,” he says.
“In some states, stamp duty is greater for investment properties than owner-occupied properties.
“You should also consider if your investment property will be subject to any land tax obligations which can be different in each state.”
Once you have purchased the property, Rory says you might also want to consider the need for landlord’s insurance and, if you are looking to outsource the management of the investment property and factor in how much you can afford to pay in property management fees.
2. Understand the different types of loans
There are several types of loans available for investment properties, including fixed rate, variable rate and split loans.
Each loan has its own eligibility criteria, interest rates, and terms, so it’s important to research them thoroughly and determine which one is best suited for your needs.
A successful investment can hinge on the loan criteria you choose. Picture: Getty
“When buying an investment property consider what loan type best suits your current and future financial state,” Rory advises.
“Both variable and fixed rate options are available, and you might also look at taking out longer interest-only terms, for example, up to five years, rather than paying principal and interest for the total loan term.”
Split loans are also an option if you’d like both a fixed and variable rate, or an offset facility, as well as the security of knowing some of your loan repayments being fixed.
3. Compare interest rates and loan features
Once you have a list of potential loans, compare the interest rates and terms of each one.
As a property investor, Rory says you might be looking to your lender for other loan features including offset options, fixed and variable rate options or the ability to package your loan with others, so it’s important to research the product features that come with your loan.
“For example, does it allow you to re-draw or offset, are the rates competitive, how long can you have interest only – if that’s something important to you – and make sure you have full visibility of any annual fees or set-up costs,” he says.
4. Use your equity
It may be possible to use equity available from other properties to increase the amount you can borrow on your investment loan.
“This could also help you reduce any potential Lender’s Mortgage Insurance fees,” Rory says.
“Making sure you have all the information when it comes to calculating available equity is really important. The amount you can borrow against your property may vary depending on the property type and location.”
Your borrowing capacity may vary based on available equity on an existing property. Picture: Getty
With the support of your lender, you should speak with your financial advisor or accountant to understand what structures best suit your circumstances.
5. Review the lender’s requirements
Each lender may have different requirements for eligibility so it’s important to understand your borrowing power with your preferred lenders.
“The deposit you need for any property can vary depending on the type of property, the value of the property and the property location,” Rory says.
“Sometimes you may be able to borrow more if you have mortgage insurance applied to the loan.”
6. Consult with a financial advisor
It’s always a good idea to consult with a financial advisor or lending specialist before making any financial decisions.
They can provide you with valuable insights and advice based on their experience and expertise.
7. Think about what’s important to you
Getting a good deal on your home loan is one thing, but you’re entering into a long-term financial relationship so it’s important to also determine your lender non-negotiables.
Your lifestyle and the needs of your family should be a major consideration in your choice of loan. Picture: Getty
“Think about your everyday banking habits,” Rory says.
“For example, is being able to go into a branch important to you, or are you looking for a relationship manager to be able to check in with? Importantly, you may also want to consider if the lender could assist with future investment property purchases.”