Home Loan Refinance
Home Loan for Investment Property
At ARG Finance, our mortgage brokers compare hundreds of loans from a wide variety of lenders and work with you to find the right loan for an investment property that suits your individual needs.
Congratulations on finally taking this step! Building wealth on brick and mortar is what everyone hopes to do one day. Whether it’s investing in residential or commercial property, a wise and patient decision can help you generate consistent, tax-friendly rent returns with long-term growth in value.[readmore]
If this is your first property investment, you might not know just how different the process can be compared to getting a home loan for a property you plan on living in. Fear not! At ARG Finance, we’ve helped hundreds of people find and secure their ideal investment loan.
Getting Started
What pulls people towards investing in a property are the many benefits, such as regular rental income, tax benefits and increased value in the long term. However, it must not be ignored that getting a home loan for an investment property is considered riskier by lenders (or banks). The sources of this increased risk include defaulting as a landlord, tenants destroying your property, not having tenants at all and overextending yourself. This means convincing lenders becomes harder.
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Also, an increased risk means a higher interest rate on the loan, a higher down payment and going through stricter loan issuing standards. To reap the desired rewards from your investment, it’s essential to dedicate substantial time towards finding and securing the right property investment loans.
Questions to ask before you begin
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| COMMERCIAL PROPERTY | RESIDENTIAL PROPERTY | |
|---|---|---|
| What is it? | Covers a wide range of options from office, retail spaces, car parks, to industrial properties like warehouses and factories | Covers apartments, standalone houses, bungalows and duplexes |
| Affordability | More affordable and sometimes even cost less than residential property | Require more maintenance and cost higher than commercial properties |
| Long term leases | These usually run for longer periods (several years) | These usually run for shorter periods (6 to 12 months) |
| Vacancy period | Can be long | Tend to be shorter |
| Impact of Goods and Services Tax (GST) | Applicable; but you can claim it back as an investor | Not applicable |
| Maintenance costs | Paid by the lessee | Paid by the landlord |
| Risk and rental returns | Higher risk and higher rental return | Lesser risk and lesser rental return |
| Deposit required | Larger deposit required, >30% of the purchase price | Lower deposit required, nearly 20% of the purchase price |
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| APARTMENT | HOUSE |
|---|---|
| More affordable, provide higher returns | Land component of the property increases the potential for capital growth |
| Easier to maintain | Comparatively difficult to maintain, but have greater scope of adding value through renovation |
| Strata fee required for maintenance | No strata fee required for maintenance |
| Depreciation deductions are greater as depreciation on commonly owned facilities can also be claimed | They offer scarcity factor which means fewer periods of vacancy |
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| NEW PROPERTY | EXISTING PROPERTY |
|---|---|
| Artist’s impression can paint an overly flattering picture leaving you disappointed | You know exactly what you are buying (outlook, size, finish, neighbourhood) |
| It is likely to be fresh, clean, modern and defect-free | They might have signs of wear and tear and possible defects and pest infestation |
| Offers greater depreciation benefits and requires less maintenance over time | Offers lesser depreciation benefits and requires more maintenance over time |
| You might over or underestimate the rent amount which you can command | They have a known rental history, a value you know you can demand |
| You can also charge a premium rent for providing a new property | Provide better opportunities of adding value through renovation, subdivision, etc |
| Appliances would be covered by warranties and insurance | Appliances may be out of warranty period and may require repairs |
Common Features to look for in a property
- Quiet street and safe neighborhood
- Good lighting on street
- Home security system if desirable
- Storage/ Cupboards for bigger families
- Off street or undercover parking as per the type of property
- Low maintenance garden for growing families
- A pleasing outlook
- Accessible location
- Well connected to public transport
- Close to lifestyle and public amenities
- Area of high rental demands and returns
Private Treaty vs. Auction
| PRIVATE TREATY | AUCTION |
|---|---|
| Seller and buyer enter into a private negotiation, generally supervised by a real estate agent | Whoever bids highest, wins the property. It is better to appoint someone experienced to bid on your behalf |
| Upon initial agreement, a deposit of about 10% of the agreed sale price is paid by the buyer | If you win the bid, you have to submit the closing deposit then and there |
| As a buyer, you can call off the purchase anytime during the cooling off period | There is no cooling off period and hence, you cannot back out of the purchase |
| The whole purchasing process takes weeks to iron out negotiations | Buying at auction is quick and sale can be closed within a few minutes |
| You can apply for a loan later to finding a property | You must have a pre-approved loan before bidding into the auction |
BETTER SUITED LOAN TYPES
Fixed rate loans
- The interest charged annually can be calculated upfront based on investment property loan rates and pre-paid each year, allowing you to claim this amount as a tax deduction.
- This can even out your tax bill for the past years where income from other sources was higher than normal.
Interest only loans
- You will have to pay only the interest on the loan, with no repayment of the principal.
- The principal will be paid at the time of selling the property.
- Additionally, all your repayments are tax deductible.
- For serial property investors, this is a very lucrative option. However, it must be kept in mind that most lenders offer this option only for a limited period (~5 years).
Interest Only
- This investment property loan in Melbourne will allow you to withdraw cash from your loan up to a certain limit as and when you need.
- With an interest only loan, your loan balance gets reduced by the cash coming in and increased by cash going out.
- This loan is suited for an experienced investor, as there are no set repayments and a certain level of cash management discipline is required.
- You can use an investment loan repayment calculator to determine how much your repayments will be for the type and amount of loan that you acquire.
Loan calculators
Managing your property
A rental property needs regular maintenance unlike other investments like shares or term deposits. Looking after the property yourself or appointing a professional property manager is solely your choice.
DIY vs. Property Manager
Involves hassles of legal responsibilities as a landlord[readmore]
DO IT YOURSELF
- Saves money
- Property manager can advise you on how to handle your legal responsibilities
- It might take time and money to handle tenants, property inspections and repairs.
PROPERTY MANAGER
- You may have to pay a fee of about 7% of the rental income to the manager.
- Property manager can take care of everything for you.
ASSOCIATED COSTS AND OPTION OF EQUITY
- Establishment fees
- Solicitor fees
- Stamp duty
WHAT IS EQUITY?
Equity in real estate refers to the difference between the current market value of your property and the outstanding balance on your mortgage. It represents the portion of the property that you truly own, free and clear of any debt. As you make regular mortgage payments and own a home for an extended period, your equity gradually builds up. This increase in equity is driven by factors such as appreciation in the property’s market value and the reduction of the mortgage principal through repayments. Having substantial equity can provide financial advantages, acting as a form of savings and a safety net. It can also serve as a valuable resource for real estate investments, allowing you to access funds for purchasing additional properties.
However, accessing equity can only be done if you pay certain fees and costs, one of them being Lender’s Mortgage Insurance (LMI) if you want to access over 80% of your property’s value. Choosing another lender or loan type will have its own associated costs too.
HOW TO ACCESS EQUITY?
- Calculate the available equity – This can be estimated by a real estate agent or a credit advisor who can organise a valuation by a lender.
- Calculate the ‘accessible’ equity – Not all of your equity is accessible. Your servicing capability of repaying any additional payments play a crucial role here. An experienced mortgage broker will be equipped to advise you on this matter and help you work through your finances.
IF YOU DECIDE TO SELL
If you decide to sell your investment property, you will need to pay Capital Gains Tax (CGT). This is a tax paid on the difference between the selling and purchase price of the property, which can include:
- amount paid for the property
- legal fees
- stamp duty
- other upfront costs
- cost of renovations done by you.
The Tax Office calculates CGT from the date you entered the contract as the date of purchase, not the settlement date. You must maintain a strict calendar regarding every detail. Also, properties purchased after October 1999 which have been owned for a period of 12 months might be eligible for a discount of up to 50% on CGT depending on the ownership structure of the property.
For such reasons, CGT calculations tend to get complicated. A credit advisor should be consulted to avoid any undesirable situation
TAX DEDUCTIONS YOU CAN CLAIM
You can claim two types of depreciations – depreciation on fittings and fixtures, and depreciation on the building itself. Buildings constructed between 1985 and 1987 depreciate by 4% annually, while those constructed after 1987 depreciate at 2.5% annually.
Depreciation is one area where it pays to get professional assistance. With a quality surveyor, you can be assured that the property will be properly inspected. A surveyor will also draft a complete depreciation schedule, ensuring that nothing is missed and nothing is overstated in your claim, which could cost you tax penalties.
NEGATIVE GEARING
When your property generates less rental income annually than your yearly mortgage repayment amount, it’s called a negative gearing property. This is a taxable loss which means that you can get the negative amount deducted from your tax returns by showing a loss. This is called PAYG Withholding Variation. However, it must be done with caution because a loss, though it may provide some short-term benefit, is still a loss in the long run.To minimise the risk of negative gearing:
To minimise the risk of negative gearing:
- Choose a property that is in a good location with desirable amenities available close by. This will ensure that your property is never without tenants.
- Manage your income well enough to pay off all the expenses of maintaining the investment property.
- Get your mortgage insured to protect yourself from any unforeseen circumstances.
POSITIVE GEARING
When your property generates more rental income annually than your yearly mortgage repayment, it’s called a positive gearing property. This is a taxable profit and you, as a landlord, need to set aside some amount to be paid as taxes for owning that property.
Call or Enquire Online Today
Whether you want a renter occupied or owner-occupied investment property, the team at ARG Finance can help you find and secure the right loan. Give us a call or enquire online today. You can also use our investment loan calculator to get a better idea of how much you can borrow.
Warning: Before making any decision that could have potential financial implications, seek professional guidance from a qualified tax advisor or accountant to ensure you have accurate and comprehensive information.
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