There are several types of loans that are available to property
investors and within these loans are a couple of fundamental
options that you will need to decide upon. These options include:
| This is a choice between whether
you wish to have the loan balance reducing by making principal
and interest repayments or have the loan remain at the
original level borrowed by only making interest repayments.
Investors are usually advised to take an Interest Only
loan, the theory being that principal reductions on an
investment loan are not tax deductible, so therefore that
money that forms the principal repayment could be used
to further invest in another tax advantaged investment,
thereby maximising your tax benefit. |
| This choice
is about whether you are comfortable with your loan repayments
fluctuating with interest rate movements. Investors are
quite often advised to select a fixed rate as this ensures
a consistent monthly repayment amount allowing ease of
budgeting, so should rates move up your repayment will
not be affected. These days fixed rate loans are not
as restricted as they once were, where many lenders allow
some principal payments to be made without penalty, although
in most cases penalties still exist should you pay out
the entire loan whilst still in the fixed period. Also,
most lending institutions have little if any difference
in interest rate between an investor or owner-occupier
loan. |
There are four basic
types of loans that lenders offer and that are available
for investment property purchase. Each lender has their specific
name for their product and each will operate a little differently
from any other but what follows is a brief outline.
| This is
your standard loan that we all have become accustomed
to over the years. You select the term that you wish
it to run and decide whether you would like a fixed or
variable rate. Usually the fixed terms run between 1
to 5 years although a couple of lenders do offer up to
10 years. Quite often you will also have the option of
an initial interest only period of generally up to 5
years. Many investors would have a loan like this as
these have been around for a long time. |
| As the name
suggests this loan is a line of credit, which means the
bank will approve a maximum loan amount against the property
that secures the loan (generally 80% of the value), and
you are free to draw this facility up and down at will.
It operates like an overdraft account and most often
comes with a chequebook and debit card for ease of access
to funds. Generally these loans are interest only and
have no term attached, which suits an investor as they
are most often advised to get an Interest Only loan.
This loan could be used on the investment property or
the family home or perhaps one on each. These loans have
a high level of flexibility in that you can park money
in your loan when it is available and draw it as required
without notifying the bank, as long as you stay within
your approved limit. |
| This loan
has a bit of everything and provides the maximum flexibility
of all loans. The loan is set up with sub-accounts so
you can separate your different lending requirements
and each account can be tailored with the features you
need to suit the occasion. For example, lets say Account
1 is your home loan and you might like to have it as
a principal and interest loan with a 3 year fixed rate,
Account 2 could be $30,000 Interest Only line of credit
on variable interest and used for say your share trading
and Account 3 could also be an Interest Only Line of
Credit but with a 5 year fixed rate for the investment
property. The Multi Account Loan and the Line of Credit
Loan usually have a higher interest rate than a standard
amortising loan - this is a charge for the added flexibility
and complexity. |
| The Offset
Account loan is generally not a loan that an investor
would use on the investment property but rather on their
family home to use in conjunction with their investment.
An Offset Account loan has a deposit account linked to
the loan, the benefit is that any surplus funds that
you might have, for example rental income, can be deposited
into the deposit account and this is offset against the
loan it is linked to. For example, if the loan amount
outstanding is $100,000 and there is $5,000 in the offset
account the interest that is charged on the loan will
be calculated on $95,000. The effect this has is that
the home loan gets paid out at a faster rate because
your standard monthly repayment has been calculated on
the full amount outstanding. Offset Account loans vary
in the amount that is offset, meaning that some lenders
may offset only 50% of the funds held in the account
whilst others offset the full 100%, so you need to pay
attention to ensure you get the best loan for your needs. |
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