Property Investment Loan Tips!
Considering Finance for Your Investment Property?
If you're considering investing in property, you'll need to think carefully about the home loan you choose. Let's run through a few loans that will hopefully to give you a better idea of what's on offer and answer some of your questions along the way.
Choosing the right property is a critical part of property investing - but so is choosing the right loan to go with it.
Before you look at specific products, it's a good idea to take a step back and think about how you intend to pay off your loan.
PRINCIPAL AND INTEREST REPAYMENTS
Paying off principal and interest means that there are two parts to your payment the first is the repayment of the principal itself, the second is the interest accrued.
To begin with, you'll mostly pay interest. But as time passes and you chip away at the loan, you'll start paying a greater percentage of the principal.
INTEREST ONLY REPAYMENTS
With interest only repayments, you defer the repayment of your loan principal for a set period (usually the first 5 or 10 years). Once the agreed interest only period ends, you'll start repaying your principal.
There are two ways you can do this. You might pay it off each month (in arrears), or once a year (in advance). 'In arrears' is usually at the end of each month; 'in advance' is in that year's first month.
Paying interest in advance could help bring forward tax-deductible interest payments (which may reduce your taxable income). As always, it's a good idea to run this past your accountant first.
There are risks involved with getting an interest only repayment loan. For example, if your property declines in value during the interest only period, you could come out with no equity. Meaning, you may end up owing more.
Pitfalls of Interest-Only Mortgages
- Higher repayments when interest-only period ends
- More expensive over life of the loan
- Principal will not reduce
- Interest rate may be higher than a principal and interest loan
- Benefits of interest-only mortgages
- Lower repayments at start of the loan
- Greater tax deductions for investment properties
- Can be used for a bridging or construction loan
PRINCIPAL AND INTEREST VERSUS INTEREST ONLY
The two main methods of repaying a home loan are making principal and interest payments or paying interest only.
If you've decided to build your own investment property, then a building and construction loan could be the way to go. With a building and construction loan you'll have the ability to draw down on your loan in increments, so you can pay the invoices associated with your build as they come in.
A typical house construction scenario has five stages:
- Laying the slab
- Roofing and tiling
- The internals
- The final payment.
The advantage of paying each building invoice as it comes in means that you won't pay interest on your building costs until the work has been done.
For example - say you've had a $350,000 loan approved and the first invoice in is for the slab - $60,000.
If you draw down the full loan, you'd be paying interest on $350,000. But a well-structured construction loan can let you draw down the money you need when you need it. Keep in mind that you'll need to budget for your interest amount rising as you draw down more to pay your invoices.
Another tip is by having an interest only period, you won't have to pay off the principal of your loan during this period. This can give you better cash flow through the critical time of building which is when a lot of people have more expenses to handle at the same time as paying for rent and your new loan.
LINE OF CREDIT
A line of credit is a set amount of funds that you can access at any time, meaning that you can choose how and when you make repayments. This makes it ideal for someone who is thinking about building an investment property.
The interest on a Line of Credit loan accrues on the amount you've used, so you'll need to keep on top of your interest payments.
Do You Have More Questions?
Fox Finance Group is one of Australia's leading personalised financial service organisations. We have spent many years getting things right so that you can rest assured that you are getting the very best financial advice available on the market today. We work for you, not the banks, plus we can have a loan pre-approved ready to go the same day!
As a Fox Finance Group Client, you have access to your very own Accredited Loan Specialist along with access to your very own Qualified Financial Planner. Our team comprises of specialists with many years' experience in Car Loans, Home Loans, Bike Loans, Boat Loans, Jet Ski Loans, Camper Trailer and Caravan Loans, Truck Loans, Personal Loans, Business Loans, Insurance, Financial Planning and more. Yes, we have a large team here at Fox Finance Group ready to help you.
We pride ourselves on the unique personalised service that we provide our Clients. Your Loan Specialist can help you either over the phone, via email, at your home, at your work or at your own business. You get their direct email address and mobile number, which makes it easy for you to stay in contact with them when you have questions.
Here at Fox Finance Group, our team care about helping you understand your credit score and what it means for you. Speak with your Lending Specialist about how we help you protect your credit score and what you can do to grow your credit rating.
If you are keen to learn more or you are ready to act now, you can contact us on 1300 665 906 or you can get started here.