Mortgages for investors
Many people borrow money to buy
investment properties, aiming to benefit from rising
property values or to earn rental income.
If this is in your plans, you'll
want to shop around to compare fees, interest rates and
services just as you would if the loan was for your own
home. But there are some additional things you'll need to
consider which can have a big impact on your investment
returns.
In this section you'll find
information about:
Lending criteria for investment loans
Many lenders provide loans for
residential property investments at the same interest rates
and fees as their ordinary home loans. Some lenders will
even lend to 95 percent of the property value. But a few
lenders have lower lending limits for investors, or will
lend a lower proportion of the property value if you're
buying an apartment, or a residential property outside the
urban areas. This just reflects the higher risk lenders are
taking.
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As with ordinary home loans, lenders
will look at what you can afford to repay. For example, a
lender might prefer that the interest on the loan should not
be more than 75 percent of the gross rental income and 35
percent of your gross personal income.
Tax deductibility
One of the key differences between a
loan for your own home and for an investment property is
that the interest on a loan taken out for investment
purposes is tax deductible. It doesn't matter whether the
property used as security for the loan is your own home or
one you rent out - it's the purpose of the loan that is
important.
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If you rent your old home out and
borrow money to buy or build another home to live in, then
the interest is not deductible, since the purpose of the
loan isn't investment. Similarly if you borrow on your
rental property to buy say a boat, the interest will not be
deductible.
Some lenders and brokers have
particular expertise in lending for investment.
How borrowing affects your investment return
and risk
The larger the proportion of a
property value you borrow, the larger the risk you face and
potential returns you can earn. If you only have a little
bit of equity (your own money) in a property, then increases
in the property value will magnify the returns on that
money.
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Apart from falling property values,
other risks you need to consider are interest rate rises,
long periods when you can't find a tenant, or if you lose
other income you rely on to help support the loan.
Some investors set out to make a
loss on their property investment, at least in the early
years. This is called "negative gearing". It occurs when the
income you earn from a rental property is less than the
costs you face. The loss you make can be offset against tax
you pay elsewhere, for example on a salary. Investors who
make a loss on a property that is negatively geared are
counting on capital gain to more than offset the loss over
time. They are still losing money in the short-run, however.
Whether and when to repay the loan
Many investors who want to build up
a number of properties take interest-only mortgages. This
helps cash flow which can be used for upgrading properties
so rents can be lifted, or to provide deposits for more
property purchases. If you still have a mortgage on your own
home, it allows cash to go towards paying this off.
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If you only want one or two rental
properties, you expect little growth in property values
where you live, or you are nearing retirement, paying off
investment property loans will help you reduce risk.
