There has been plenty of media recently about measures the Banks are taking to slow lending to investors. In this article, we will look at what is happening in the investment lending space, what loans are available, the pros and cons of investment lending and things to look out for.
APRA, the organisation that monitors the banking industry, has concerns regarding the continuing price increases being experienced in Sydney and Melbourne. They are particularly concerned about the level of investor activity which is keeping the property market hot. They have for some time now been capping the level of new investor loans banks can lend and they are now placing a cap on the level of interest only loans a Bank can offer.
It isn’t all doom and gloom. Understanding what is involved in the investment lending space and working with a good broker will ensure you are still able to buy your first or fifth investment property.
Like owner-occupied loans, the types of loan facilities available are variable or fixed loans and lines of credit. Also, like your owner-occupied loan, you can have principal and interest repayments or interest only repayments. Depending on what you are looking for with an investment property will dictate what product and facilities suit you.
Which Loan Product is for me?
Like your owner-occupied loan, it will depend on your circumstances, what you want to achieve with your investment property and how long you plan to keep your investment property for.
Standard loan products, fixed and variable rate loans are suitable, most lenders these days will allow multiple splits of a loan so you can keep your investment debt separate to your owner-occupied debt.
If selecting variable rate loan, the amount you pay generally fluctuates in line with the changes to the official cash rate. These types of loans tend to have flexible features such as redraw. With a fixed rate interest loan, the interest rate doesn’t change for the period of the fixed rate. This is useful for investors as it provides certainty of repayment, and therefore a more manageable cash flow.
A line of credit is also suitable for investors. A line of credit has a limit (like a credit card) as you build equity in an existing property, either through capital growth or paying down the loan. This equity can be used to fund the purchase of a new property without the need for completely restructuring your finances. It also allows you to easily access funds (within your credit limit) should unexpected expenses arise.
Interest only loans
An interest only loan is where only the interest is paid over a set period, rather than both the principal and interest (P&I loans). These loans typically have a maximum period of 5 years. Once this five-year period is up, the loan will return to regular P&I repayments. This type of loan is useful for property investors who want to minimise the amount of their own money they use for the property and maximise the yield they earn on their investment property.
The obvious benefit of an investment property is wealth accumulation. Like any asset, investing in property as it grows in value builds wealth.
Also, like any other investment, the costs of acquiring and holding the asset are tax deductible. If an investment loan is required the interest costs of the loan can be used to reduce taxable income (thus reducing tax payable). It is not just the loan that assists with tax deductibility, any costs associated with holding the investment property assist in reducing tax payable.
Understanding all the costs in purchasing an investment property, from legal costs, to stamp duty and if borrowing, costs associated with establishing the investment loan. If you have an investment loan, know the loan repayments are still required, even if the property does not have a tenant.
As with any investment, speak to a financial adviser and if borrowing, a mortgage broker.