Top Features to Compare Property Loans
Comparing Investment Property Loans: Top Features to Look For
Investing in property is one of the most popular ways to build wealth, and choosing the right investment property loan is a crucial step in the process. With so many loan products available, it can be difficult to know which one will best suit your financial goals and investment strategy. To make the decision easier, it’s important to focus on the key features that will provide you with the flexibility, cost-effectiveness, and benefits you need to maximise your returns.
This article will break down the top features to look for when comparing investment property loans, ensuring you choose a loan that works in your favour and aligns with your investment objectives. From interest rates to loan flexibility and extra features, we will explore the essential aspects you should prioritise when selecting a loan for your next property investment.
1. Interest Rate: Fixed vs. Variable
The interest rate on your loan is one of the most significant factors to consider, as it will directly affect your monthly repayments and the total cost of your loan over its life. Generally, there are two types of interest rate options available for investment property loans: fixed and variable.
Fixed Interest Rate
A fixed-rate loan locks in your interest rate for a set period, usually between 1 to 5 years. This provides certainty, as your repayments will remain the same throughout the fixed term, even if market rates rise. This can be an appealing option if you want stability and to protect yourself from future interest rate hikes.
However, fixed-rate loans may come with certain limitations:
- You may face break fees if you choose to refinance or pay off the loan early.
- Fixed-rate loans often have fewer flexible features, such as the ability to make extra repayments.
Variable Interest Rate
A variable-rate loan, on the other hand, allows the interest rate to fluctuate according to market conditions. While this means your repayments could increase if interest rates rise, you also have the potential to benefit from rate cuts.
Advantages of a variable rate loan include:
- Greater flexibility to make extra repayments or pay off the loan faster without penalty.
- Potential for lower initial rates compared to fixed loans.
The key consideration is the potential for repayment variability. If you expect rates to rise over the course of the loan, a variable rate may increase your repayment burden. However, if you prefer flexibility and the possibility of lower repayments, a variable rate could work well for you.
What to Look For
When comparing interest rates, weigh up the pros and cons of both fixed and variable loans. If you’re risk-averse and prefer stable repayments, a fixed-rate loan might be ideal. On the other hand, if you’re open to fluctuations in rates and want greater flexibility, a variable-rate loan could offer more benefits in the long term.
Some lenders may also offer hybrid loans, which combine both fixed and variable rate components. This can be a good option if you’re looking for a balanced approach to risk and flexibility.
2. Loan Structure: Principal and Interest vs. Interest-Only
One of the most important decisions property investors need to make is whether to choose a principal and interest (P&I)loan or an interest-only (IO) loan. Both options have their pros and cons, depending on your investment goals and strategy.
Principal and Interest Loans
With a P&I loan, your repayments cover both the interest and the principal (the actual amount borrowed). As you repay the principal, you gradually build equity in your property.
Pros:
- You reduce your loan balance over time.
- It can be a good option if you’re planning on holding the property long-term and want to build equity.
Cons:
- Monthly repayments are higher, which may affect your cash flow in the early years.
- You may have less cash available for other investments or expenses.
Interest-Only Loans
An interest-only loan allows you to only pay the interest on the loan for a set period, typically between 1 to 5 years. During this time, your repayments are lower because you’re not reducing the loan principal. This can help improve cash flow, especially if you are relying on rental income.
Pros:
- Lower monthly repayments, which can improve your short-term cash flow.
- You can use the extra cash flow to reinvest in additional properties.
Cons:
- Your loan balance remains the same during the interest-only period, meaning you’re not building equity in the property.
- After the interest-only period ends, repayments will increase significantly as the principal is gradually paid off.
What to Look For
If cash flow is a priority and you intend to hold the property for a long time, an interest-only loan can provide significant short-term benefits. However, if you’re focused on paying down your loan and building equity quickly, a P&I loan may be more suitable.
Also, consider whether the lender offers flexibility when it comes to switching between P&I and interest-only repayments. This could give you the best of both worlds, especially if your financial situation changes over time.
3. Loan Term and Repayment Flexibility
The term of your loan is another important factor to consider, as it affects the duration over which you will repay the loan and your monthly repayments. Typical loan terms range from 15 to 30 years, but shorter or longer terms may be available depending on the lender.
Longer Loan Terms
Longer loan terms, such as 30 years, reduce your monthly repayments, which can help improve your cash flow. However, this means you’ll pay more interest over the life of the loan, and it will take longer to build equity in the property.
Shorter Loan Terms
Opting for a shorter loan term, such as 15 or 20 years, will increase your monthly repayments but reduce the total interest paid over the life of the loan. This can be an attractive option if you want to pay off the loan faster and build equity more quickly.
What to Look For
When choosing your loan term, consider your investment strategy and your ability to manage higher repayments. If you prefer lower repayments, a longer loan term may be appropriate, but keep in mind the total cost of the loan over time. For those aiming to reduce interest costs, a shorter loan term with higher repayments might be the best option.
Flexibility is also key. Look for loans that allow you to adjust your repayment schedule, such as making extra repayments or switching to a different repayment structure.
4. Extra Repayment Features and Loan Flexibility
One of the features that can make a significant difference to your ability to manage your loan is the ability to make extra repayments. Some loans allow you to make additional repayments, which can reduce your principal faster and help you pay off the loan earlier.
What to Look For
- Extra Repayment Allowance: Look for loans that allow you to make extra repayments without penalty. This is especially important if you receive a windfall, such as a bonus or inheritance, and want to pay down your loan faster.
- Redraw Facility: Some loans offer a redraw facility that allows you to access the extra repayments you’ve made. This can be particularly useful if you need to access funds in the future.
- Early Repayment Fees: Check for any fees associated with paying off the loan early. Some loans may penalise you for paying off the loan before the end of the agreed term.
Having the flexibility to make extra repayments can help you reduce your debt more quickly, improve your cash flow, and potentially save you money on interest payments in the long run.
5. Loan-to-Value Ratio (LVR) and Deposit Requirements
When applying for an investment property loan, the Loan-to-Value Ratio (LVR) is one of the key factors lenders use to determine how much you can borrow. The LVR is the percentage of the property’s value that you are borrowing, relative to the property’s value.
What to Look For
- LVR Limits: Most lenders offer loans with an LVR of up to 80%, but some may lend up to 90% or 95%. The higher the LVR, the more you need to borrow, but this also means you will need to contribute a larger deposit to avoid paying for Lenders Mortgage Insurance (LMI).
- Deposit Requirements: Ensure you have sufficient funds for the deposit, as well as other associated costs like stamp duty, legal fees, and insurance. A larger deposit can help you avoid LMI and secure more favourable loan terms.
Lenders with higher LVR options may offer more flexibility, but it’s important to weigh the additional risks involved with higher borrowing levels.
6. Fees and Charges
Fees and charges can significantly affect the total cost of your loan. While low-interest rates may be attractive, hidden fees can quickly add up, reducing the benefits of a seemingly great deal.
What to Look For
- Application Fees: Some lenders charge an application fee to process your loan.
- Ongoing Fees: These can include monthly or annual fees for managing the loan.
- Break Fees: If you have a fixed-rate loan and choose to refinance or pay off the loan early, you may face substantial break fees.
- Valuation Fees: Some lenders charge for property valuations required during the application process.
When comparing loans, ensure you ask for a detailed breakdown of all fees and charges to get a clear understanding of the total cost of the loan.
Choosing the right investment property loan is crucial to your success as a property investor. By focusing on the key features outlined in this article — including interest rates, loan structure, repayment flexibility, and fees — you can make a more informed decision that aligns with your investment goals.
Remember that every investor’s situation is unique, so take the time to compare loans from different lenders, ask questions, and seek professional advice when necessary. With the right loan in place, you’ll be better positioned to maximise the returns on your property investment portfolio.
Discover the essential features to look for when comparing investment property loans. From interest rates and loan structures to repayment flexibility and fees, this guide will help property investors choose the best home loan to maximise returns and minimise risks. Learn how to select a loan that aligns with your investment strategy and financial goals.
