Part 2 in my Investing Essentials is about choosing the right type of loan. When it comes to financing your investment property, there are several different options that you can use. Choosing the right one will depend on your investment structure and strategy, but there’s no need to spend days or even weeks researching the options. Here are the most popular loan types used by property investors in Australia today.
Variable Rate Loans
With an investment loan, interest is generally tax deductible*, so even though it may be subject to interest rate rises, choosing a Variable Rate Loan for your investment property may be a good option, as it will give you flexibility and the ability to maximise your property’s profitability.For example, Variable Rate Loans frequently come with features like the ability to make extra repayments, and redraw facilities. This could help you grow the equity in your property more quickly, which you could redraw at a later date to do renovations and improve the value of your investment, or to use as a deposit to invest in another property.
Fixed Rate Loans
If you are investing on a tight budget, a Fixed Interest Rate Loan may be the better option for you. You will know in advance exactly what your outgoing finance costs will be and these will remain the same throughout the fixed interest period of your loan. This might be particularly useful for you if you are ‘negative gearing’ your investment. Whilst the interest on the loan may be tax deductible, the rental income may not initially cover all your costs and fixing the finance costs will ensure you can budget to meet your ongoing financial obligations.
Split Fixed/Variable
Using a combination of a split Fixed and Variable Rate Loan could give you the best of both worlds. You can limit increases in your outgoing expenses whilst still retaining the ability to make extra repayments and redraw them when needed. This could be a big help with saving for ongoing costs like renovations and maintenance.
Interest Only Loans
Many property investors favour Interest Only Loans as they allow you to minimise mortgage repayments and outgoing costs in the short term. They require you to pay just the interest on the loan – which is usually tax deductible, and this can cost significantly less compared to repayments on a principal and interest loan. This could be a good idea if you are investing on a tight budget and require the rental income from the property to cover all of your finance costs.
However, with an Interest Only Loan the loan repayments will not pay down the principal of the loan and increase your equity. Instead, you will be relying on rental income and the value of the property increasing over time to make a profit. If the value of the property you choose goes down, or it does not increase very much during the period of time you own it, you could find yourself making a loss on your investment.
Remember that we’re here to help you find the right loan to meet your personal financial circumstances and investment goals. No matter what kind of investment strategy you are planning on using, we can help you to structure your loans and choose the right loan products to maximise your opportunities. Why not give us a call for a chat today?
*This article does not constitute taxation advice and you should consult a qualified tax professional to see what tax benefits you can access in your particular case with regard to financing. Your personal and business financial circumstances will need to be reviewed prior to the acceptance of any finance product or offer. Lender terms, conditions and fees may also apply. Content provided By Connective Financial Services.