Investment Property Loan Types

Standard variable loans are Australia’s most common form of home loan, with the interest rate varying over the loan period and between lenders. Generally, these loans provide outstanding stability, minimal costs and also provide great features like compensation facilities, refurbishment facilities, no annual interest caps and, in most cases, no early payment penalty.

Advantages:

• Flexibility
• Lump-sum payments can be made without incurring a penalty.
• If interest rates fall, your repayments will fall.
• Often offer extra features.

Disadvantages:

• If interest rates rise, your repayments will increase.

Basic variable loans typically offer lower interest rates and fewer features than the standard variable loans. You often have the option to pay for any additional feature required. Interest rates and repayments will vary throughout the loan term.

Advantages:

• Relatively lower interest rate
• Lower repayments

Disadvantages:

• Many of these loans do not have the same features or flexibility as other variable loans

An introductory rate loan generally offers a guaranteed low rate for an initial period of time (usually 12 months), after which most will revert to the standard variable rate. The rate can be fixed or variable.

Advantages:

• Usually, the lowest rates on the market
• Some lenders provide offset accounts on these loans
• Opportunity to reduce the principal quickly during the ‘honeymoon’ period

Disadvantages:

• Payments will increase after the initial introductory/’honeymoon’ period

Under a fixed-rate loan, the interest rate is fixed for a specified period, usually between one and five years. This loan gives you the certainty of knowing exactly what your monthly repayments will be and peace of mind knowing the repayments won’t rise. However, you won’t benefit if rates go down during the fixed term.

Advantages:

• Guaranteed rate, if interest rates rise, your repayments won’t.
• Budgeting is made easier as your home loan repayments don’t change for the fixed-rate period
• Reduced risk of defaulting on your mortgage repayments should the interest rates rise

Disadvantages:

• Reduced flexibility
• Extra repayments may incur a fee or be limited
• In some cases, the fixed rate can be higher than variable interest rates of the time
• depending on the lender and product, you could potentially be charged a fee for exiting the fixed rate before the fixed expiry ends, depending on the lender

A bridging home loan is a loan that is used if you are selling your owner-occupied home to purchase a new home. It allows you to purchase a home before you sell your existing home. Our experts at First Choice are some of Australia’s best mortgage brokers who can help you avoid costly mistakes with professional financial guidance about bridging home loans.

Advantages:

• Allows you to have a new home available so that you can move into the home without being displaced and waiting for your home to settle before you purchase a new home

Disadvantages:

• Bridging loans can be more expensive than normal residential loans as there is more risk to the lender
• Additional fees such as interest repayments on the additional loan are included over the bridging period

A 100% offset loan is very similar to an all-in-one loan, but rather than using all your salary and other income into loan repayments, capital goes into an offset account that is directly linked to your home loan. Any balance in the offset account is 100% ‘offset’ against your home loan, which reduces the interest you have to repay, making your money work harder for you.

Advantages:

• Can save you a substantial amount of interest if used correctly
• Operates like a normal transaction account and has a chequebook, ATM card, etc. attached

Disadvantages:

• May have higher monthly fees attached to the account
• May require a minimum balance in the account

A line of credit loan provides you with access to the equity in your home or investment properties up to a pre-approved limit. You access the funds as you need to. The interest rate on a line of credit loan is usually a variable rate, and repayments are interest only.

Advantages:

• You can use the money when you need it and pay it back when you can
• Rates are generally lower than a personal loan or credit card
• In some cases, your interest repayments can capitalise if you have available funds, meaning you don’t need to make regular repayments

Disadvantages:

• Unless care is shown, it is possible to reduce the equity you have built-in your home

A low documentation (or no documentation) loan is suited to investors or self-employed borrowers who do not meet the ‘standard’ lending criteria. This may include those with an impaired credit history, those who are unable to provide the required documentation in support of their loan application, or those who wish to borrow more than 100% of the property value.

Advantages:

• In some cases, you only need to provide 12 months BAS statements and not full tax returns
• Can have features such as redraw, line of credit, variable or fixed rates, principal and interest or interest only

Disadvantages:

• Generally, a higher interest rate than a full documentation home loan; however, this is not always the case as it can vary between lenders

If you are building your own home or investment property, a construction loan may be suitable for you. This loan requires a fixed price building contract from a registered builder. These loans are usually interest only for the period of building and then become principal and interest once the building is finished.

A construction loan helps you to generate profit during building. With the usual necessary documents required when applying for a loan, construction loans also require a ‘fixed price building contract’ and ‘council approved plans’.

Advantages:

• Competitive variable interest rates.
• Facility to draw money when necessary whilst building.
• Interest-only payments during the building period.
• Additional payments can be made.

Disadvantages:

• Requires a fixed price building contract leaving little room for change whilst building.
• Some lenders charge a fee for every time you draw money whilst building.
• Given it is a variable loan, loan repayments will increase if interest rates go up.