The strategy To choose the right investment loan.
How do I do that? Is it different to choosing a home loan? While many investors use standard home loans rather than tailored investment loans, the priorities of investors are arguably different to those of home owners.
Investing is a business decision, so things such as knowing your outgoings will probably be more important than redraw facilities and offset accounts.
The executive director of Smartline Personal Mortgage Advisers, Joe Sirianni, says it is critical to look at your investment objectives first. Are you planning to hold the property for the long term or is it something you intend to buy, renovate and sell? Are you looking to gear up to maximise your property holdings or are you looking for an investment that will provide you with an income in retirement? Will the property require more money to be spent on it in the future or is it in good condition?
This will determine what sort of finance is appropriate. "You don't want a long-term fixed rate if you're planning to buy a run-down house, do it up and sell it," he says. "But if you want to buy for the long term you may want to look at locking in a five-year fixed rate. There are some very good fixed rates in the market at the moment."
So what is best for me? That depends on your goals, but Sirianni says if you're only investing for the short term, you'd look for a loan that is cheap and easy to get out of. If you're planning to refurbish later on, the ability to top up the loan will be important.
If you're planning to hold for the long term, he says fixed rates can work well for property investors. "In any business deal you want to lock in your costs so you can benefit as your income rises," he says. "I saw a 5.39 per cent fixed rate for five years the other day. You can lock in 5.5 [per cent] to 6 per cent for three years, which ... gives you some certainty."
He says your financial position is also important. If you're a high-income earner, he says it may make sense to maximise the gearing on the property so that you can maximise your tax deductions on the interest. So you might be looking for ways to borrow the full purchase price of the investment property. He says this will usually require you to stump up further security, but if you have substantial equity in your home, and are comfortable with using it to invest, drawing on that equity may be an option.
One warning here is to be careful to keep your investment borrowings separate from any personal borrowings you may have
Is an interest-only loan an option? Again, it depends on what you're looking for. Sirianni says interest-only loans can work well for investors who want to build a portfolio of property investments, as any excess cash flow can be used to buy more properties rather than paying down the capital. But at some stage properties will have to be sold to repay the loans. Sirianni says some investors prefer to make normal principal and interest repayments to build equity in the investment.
"If you're 35 now and you pay principal and interest, by the time you're 65 you will have a rental property that will produce an income with no interest expenses," he says. "That can sound like a pretty good superannuation plan."
And while negative gearing is something of a holy grail for many investors, Sirianni says it's not the only option. He says investors can find properties that earn more than they will pay in interest on their loans, giving them a positively, rather than negatively geared investment.
If you have "spare" rental income, he says (or if you're likely to have it in the future) a loan with an offset account can be useful as you can use that extra rental income to reduce your loan repayments without repaying the loan. That can be simpler than using a redraw facility.