Investment Loans for Real Estate Beginners

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What is a real estate investment loan? How does it differ from other types of loans? And why should I consider using them instead of conventional mortgages?

Real estate investment loans are becoming increasingly common. They allow investors to leverage their property assets into cash without having to sell them. 

If you want to invest in real estate and are looking to get an investment loan, stay with us and we will answer some of the most common questions around investment loans and property value like how do investment property loans work, interest rates for investment loans, and whether investment loans are worth considering.

What are investment loans?

Investment loans work similarly to a traditional home loan. You see a property you want to invest in, and you take out a loan and use the funds to secure the property. 

There are key differences, however, between investment loans and a traditional home loan:

  • You cannot occupy the property.
  • you will pay bigger stamp duty fees and interest rates.
  • you can write off the fees and interest as tax deductible as long as you do not occupy the property.
  • You will not be eligible for government incentives as a first time investor.
  • You earn side-income from property rental as an investor.


How do investment loans work?

There are two types of investment loans:

  • Interest-only loans

Investment loans of this type delay the repayment of the borrowed amount or the ‘principle’ for a fixed term. You will only be paying the interest rates on investment loans excluding the principal. An interest-only loan then transitions into a principal and interest loan at the end of that fixed term. 

  • Principal and interest loans

Principal and interest (P&I) loans require the borrower to pay both principal and interest in their monthly repayments. With each repayment, the borrower will pay less and less on interest as they are essentially chipping away at the balance owed at the start, and more and more on the principal.


What is the interest rate on investment property loans?

As of August 2022, the average variable investment loan rate is 4.63%, while the lowest is 3.24%. The average fixed investment loan rate is 5.71%, while the lowest is 3.99%

It is important to note that rates for investment property loans fluctuate just as much as the rates of standard home loans. However, they are more likely to be higher due to the fact that you are more likely to default on an investment loan than on a loan for a home you primarily occupy. 

In short, from a lender’s perspective, the perceived risk in investment loans is higher than that of a traditional mortgage.


How to get loans for investment properties: step-by-step guide

  1. Secure your deposit

With investment loans how much deposit you can secure will determine how much you can borrow, much like with a conventional mortgage. A 20% deposit of the price of the property immediately qualifies you for a lot of investment loans. If you don’t have enough deposit saved, you can talk to your mortgage broker to check your alternatives.

  1. Use your home equity

You may have built enough equity in your home that you already own. You can tap into it to secure a home loan.  Generally, lenders are happy to lend up to 80% of a home’s value. This means your usable equity is 80% of your home value, minus any existing debt. Below is a sample calculation of your usable equity: 

$750,000 (home value) * 80%  = $600,000 – $350,000 (current mortgage) = $250,000 (usable equity).

Read: How to use equity to buy an investment property

Also read: How much equity do I need for an investment property?

  1. Get yourself a guarantor

You can ask a family member or your spouse who has equity in a property they own to act as your guarantor.

  1. Seek help from your parents

You can obtain a cash gift deposit from your parents (if they have the means) and this can help you purchase your investment property. Lenders will consider this as a form of genuine savings since you are in no obligation to pay the money back.


How many investment property loans can I have?

You can take out as many investment loans as you can handle, as long as you are able to comply with the documentation requirements and deposit amount for each property. 


Ready to take the next step?

If you’re ready to invest in a property, or turn your home into an investment, feel free to message the home loan experts at Sunshine Coast Financial Solutions.

Give us a ring on (07) 5437 9073 or schedule an appointment with us to discuss your options.


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