TYPES of investment loansHere is a guide to the types of loans available so you can explore all options when talking to your mortgage provider.
Some of the more popular loan choices for investments are:
Interest Only Loan
This loan allows you to structure you payments where you are only paying the accrued interest – the repayments are less than those for a principal and interest loan. They are usually taken over a normal term (i.e. 25 years) with the interest only option being 1-10 years, then renegotiated. These loans are suitable if the investor is relying on a capital gain in the short to medium term.
Introductory Rate or ‘Honeymoon’ Loan
This type of loan marketing tool can be seen as attractive as it offers lower initial interest rates (i.e. six to 12 months) before reverting to the standard rates. The length of the honeymoon depends on the lender, as does the rate once the honeymoon is over. This loan may allow you to pay extra off the loan. Be aware of any caps on additional repayments in the initial period, of exit fees (these may be high if you change during or immediately after the honeymoon), and what your repayments will be after the loan reverts to the standard rate.
These loans are attractive to an owner-builder or DIY investor who in the short term will use the property as a primary place of residence and use their skills to improve the property at the same time building some equity. After the renovation they can sell for capital gain, live in it, or rent it and build further equity.
Line of Credit/Equity Line
This is a pre-approved limit of money you can borrow either in its entirety or in bits at a time. The popularity of this loan is due to its flexibility and ability to reduce loans quickly. They usually require the investor to offer security for the loan i.e. principal place of residence or other property. A line of credit can be set up over a normal term (i.e. 30 years) with the line of credit option being 1-10 years or revolving (longer terms) where you only pay interest on the money you use (or ‘draw down’). Interest rates are variable and due to the level of flexibility are often higher than the standard variable rate. Some lines of credit will allow you to capitalise the interest until you reach your credit limit i.e. use your line of credit to pay off the interest on your line of credit. Most of these loans have a monthly, half yearly or annual fee attached.
These loans are very popular with property investors. For those building a property portfolio and constantly on the lookout for the next bargain in a growth area, they can have a loan approved and waiting. For the renovator, they only have to pay interest on the money when they draw it down in each step of the project. For those seeking capital gain they can use the line of credit to purchase the property then use it to make the repayments on the property. For both investors all income is put into the line of credit to bring down the principal and interest in the loan and build equity in the property. Longer term investors may want to change a line of credit loan to a principal and interest or variable rate loan to get lower interest rates. These loans are suited to people who are financially responsible and are usually on high incomes.
This loan allows you to put additional funds into the loan in order to bring down the principal amount and reduce interest charges, plus it gives the option to redraw the additional funds you put in at any time. Simply put, rather than earning (taxable) interest from your savings, putting your savings into the loan saves you money on your interest charges and helps you pay off your loan faster. Meanwhile, you are still saving for the future (or your next investment property).
The benefit of this type of loan is the interest charged is normally cheaper than the standard variable rate and it doesn’t incur regular fees. Be aware there may be an activation fee to obtain a redraw facility and there may also be a fee for each time you redraw.
All In One Accounts
This is where all income is deposited in the loan account and all expenses come out of the account. The benefit of the All In One Account is its ability to reduce the amount owed and thus the interest payments while providing a one-stop finance shop where your loan, cheque, credit and savings accounts are combined. Normally these loans will be at the standard variable rate or slightly higher and may incur monthly fees.
Be aware that if the account is split into the loan account, with credit, cheque and ATM facilities placed into satellite accounts, you will need to check your access to funds, how many free transactions you receive, and what associated fees the loan may have.
100% Offset Account
This loan is similar to an All In One Account however the money is paid into an account which is linked to the loan – this account is called an Offset Account. Income is deposited into the Offset Account and you use the Offset Account for all your EFTPOS, cheque, internet banking and credit transactions. Whatever is in the Offset Account then comes directly off the loan, or ‘offsets’ the loan amount for interest. Effectively you are not earning interest on your savings, but are benefiting as what would be interest on savings is calculated on a reduction on your loan.
The advantages are similar to the All In One Account. These loans normally have a higher interest rate and higher fees due to their flexibility. The above three loans are for the longer term investor seeking to build equity through a property portfolio and being able to use the investment properties for tax benefits.
This is a loan where the overall money borrowed is split into different segments where each segment has a different loan structure i.e. part fixed, part variable and part line of credit. Often called ‘designer loans’, the investor benefits from one or more types of loans. This type of loan is good for people with one investment property and a primary residence and who may be looking for a further investment property.
The one loan for both properties can be split into three components, paying principal & interest on the primary residence and interest only on the investment property, plus having a line of credit option if seeking to purchase a second investment property.
These loans are tailored to those building a home when you don’t need the entire amount from the start – you only pay interest on what you’ve spent over the stages of construction.
CONTACT Us today
Accurate answers are vital. Our staff are ready to answer any of your questions and can provide a range of detailed analyses using our many software tools. click here