Investing in property takes a well-crafted strategy. Aside from being aware of your financial health, you should be able to have the discipline to think of ways to grow your earnings over time.
Strategising often starts with choosing the best investment home loan to help you finance your target property. When hunting for the best deal, it is a must to look beyond the home-loan products' interest rates. Many home-loan offers may have lower interest rates but will not give enough flexibility for you to play your cards your own way.
Home-loan features help you in different ways — some help you manage your finances while others help you shave off time of your mortgage. The best features, however, are those that can significantly reduce the cost of the loan, eventually helping you save hundreds, even thousands, every year.
Here are some of the best features of an investment loan and how they can help you:
1. Interest-only payments
An interest-only home loan enables borrowers to pay only the interest for a certain period of time, usually from five to 10 years. The principal amount of the loan stays intact for the loan term.
Aside from paying lower monthly repayments, investors can also take advantage of tax claims by taking out an interest-only loan, particularly if they rent out their properties.
For instance, if you receive $25,000 in rent for a year and you pay cumulative interest repayments of $28,000 annually, this would mean that your property is negatively geared. You are then entitled to claim the difference between the amount of your interest repayments and your rental income.
This is helpful if you have any other personal debt you would like to focus on, given that such is not tax deductible. The extra amount you can save from interest-only payments can also be used for other investment ventures which can really support you in growing your portfolio.
2. Repayment holiday
Investors often depend on rental income to cover the bulk of their mortgage repayments. However, there are instances when properties are left unoccupied and therefore are unable to supply you with a steady stream of money to help you pay the monthly dues.
In cases like this, a repayment holiday is your best friend. If your home loan has this feature, you can take a break from making repayments for a certain period of time, which is usually up to a year.
Typically, a lender will only allow you to temporarily stop your monthly payments if you have made extra or advance payments to create a buffer. You can arrange this with your lender and see what terms they have.
The only disadvantage of having this feature is that interest charges continue to accrue while you are on a repayment lull. This means that at the end of your loan term, you will have paid more than you originally owed.
3. Ability to choose repayment frequency
In order to properly manage your finances, you have to make sure that your payments are organized at your most convenient way.
On important feature that is often overlooked not just by investors, but by homebuyers in general, is the ability to choose the frequency of repayments. When you have an investment property, it is advised to sync your repayment schedule with how often you get rental payments from your tenants. If your tenants pay rent on a weekly basis, then your repayment for your home loan should be on a weekly term as well.
This will not do much in the short term, but it can add up and help you save on your home loan. For instance, setting your repayment schedule on a fortnightly basis allows you to make an extra month of repayment, given that there are 26 fortnights a year, which is equivalent to 13 months.
4. Offset account
An offset account is another popular home loan feature for investors, who often use it as a replacement to their everyday bank account.
Essentially, an offset account works like a savings account in which you can stash your extra funds. It comes with a debit card that you can use to withdraw money and to pay for regular purchases.
An offset account is useful especially if you want to cut the interest charged to your loan. The balance on your offset account reduces the amount charged with interest: Say you have a $400,000 loan with a 5.25% mortgage rate and you have $80,000 on your offset account. In that case, the rate will only apply to $320,000.
Most investors hit two birds with one stone by using an offset account. They get to reduce the interest they pay, while at the same time save enough to fund another investment property purchase.
There are partial offset accounts and full offset accounts, but the latter are only typically available to those with variable home loans.
5. Minimal home-loan fees
When investing you should be wary of every cost you have to pay. You want to save as much as you can to maximise what you earn from your investment portfolio. This is why it is a must for you to get home loans that have minimal fees. These home loans will allow you to pay your costs upfront, relieving you from having to worry about other costs over the period of your loan.
When looking for home loans, list all the costs associated with the product and negotiate with your lender. Ask them which ones can be paid upfront and which ones can be waived.
As much as possible, you should also look for investment loans with no application fees. Lenders usually have this type of investment loan as part of a promotion or a packaged home loan. Ask your lender if these investment loans are available.
6. Line-of-credit facility
A home loan with a line-of-credit facility allows you to access a predetermined amount of credit. This means you can borrow extra money whenever you want without applying for another loan.
The amount you borrow is typically secured against the equity you have in your property. If you meet your lender's rules, you will be able to take out a loan against a certain proportion of the equity you have built in your home.
The loan can be for anything: renovations, holidays, or even a car purchase. The good thing about this home loan feature is that you will only pay interest on the amount you have already used.
However, you have to take note of some trade-offs. First, due to the convenience of the line of credit facility feature, home loans with such features often have higher interest rates. You also have to be aware of the fees that come with it.
This is an updated version of a guide originally published in March 2019.