When it comes to real estate, property investment is quite a different prospect to buying a home.
As you search for an investment property, you’re likely to be more interested in things like rental yield and capital growth rather than if it’s an easy commute to work or has a swimming pool in the backyard.
Similarly, loans for property investment tend to be structured a little differently to home loans. When looking at funding for an investment property you’ll want a loan type that best suits your investing needs.
Knowing which types of features and repayment options are available for investment property loans can help you identify what will work best for you and make the most of your investment.
Line of credit
A line of credit typically gives you a little more flexibility when borrowing by allowing you to draw down on the loan to access additional funds when you need them. This can be useful if, for example, you need to make repairs.
Essentially, a line of credit works like a credit card – you have a set limit of credit and you can borrow up to this sum with interest paid only on the outstanding balance. With CommBank’s Viridian Line of Credit, if you’ve built up enough equity (or credit) you can tap into the existing equity to make additional investments without having to apply for a new loan.
With an interest-only loan, your loan payments only cover the interest for a set period of time – they don’t reduce the principal amount owing. Because you’re not paying off any of the debt on the property, the repayments are lower and can also be claimed as a tax deduction. However, once you reach the end of your interest-only period your repayments will automatically increase.
Once you start paying both principal and interest, only the interest on your investment home loan can be claimed as a tax deduction. In some cases you can choose to pay interest annually in advance, to help reduce your taxable income (though with CommBank this is only available on our Fixed Rate Home Loans).
Interest-only home loans can enable investors to secure a property while minimising their repayments. So assuming the property’s value goes up enough over time, an investor can eventually sell it and then use the money to pay off the principal while still making a profit. There is, however, always a risk with interest-only loans that the property’s value doesn’t sufficiently increase, in which case you may end up with a large debt owing on it.
An offset account is an account that’s linked to your home loan. The balance of the account is offset against the balance of the home loan, meaning the amount of interest you’re charged is reduced. You can still access the money in that account as needs be.
Offset facilities aren’t available on all home loans, but where they are they typically come in the form of a linked transaction account or savings account.
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