Investment Property Loans: Avoid These 5 Common Mistakes

Understanding Investment Loans for Established Properties

When buying an investment property, securing the right finance is crucial to your property investment strategy success. Investment loans differ significantly from owner-occupier home loans, with specific features designed for rental property purchases. Whether you're considering a town house, apartment, or stand alone dwelling, understanding these differences will help you make informed decisions about your first investment property or expanding your investment property portfolio.

Investment loans typically offer access to investment loan options from banks and lenders across Australia, each with varying terms and conditions. The loan amount you can secure depends on your borrowing capacity, which lenders assess differently for investment purposes compared to owner-occupied properties.

Key Features of Investment Property Loans

Rental property loans come with specific characteristics that investors should understand:

• Higher Interest Rates: Investment loan interest rates are typically higher than owner-occupier rates, reflecting the increased risk lenders perceive with investment properties
• Loan to Value Ratio (LVR) Restrictions: Most lenders limit investment loans to 80-90% LVR, requiring larger deposits
• Lenders Mortgage Insurance (LMI): Required when borrowing above 80% LVR, adding to your upfront costs
• Rental Income Assessment: Lenders typically count 75-80% of projected rental income when calculating borrowing capacity
• Interest Rate Options: Choice between variable interest rate and fixed interest rate products, each with distinct advantages

Calculating Your Investment Loan Requirements

Before applying for an investment loan, you need to research property markets and determine your budget. Calculating investment loan repayments involves considering several factors:

1. Principal and Interest Payments: Based on your loan amount and chosen interest rate
2. Additional Costs: Including stamp duty, legal fees, and ongoing property management expenses
3. Rental Yield Expectations: Understanding potential rental income from your chosen property type
4. Negative Gearing Implications: How loan repayments and property expenses compare to rental income

The Investment Loan Application Process

The application process for investment loans requires thorough documentation and preparation. Lenders will assess your financial position through various documents:

• Recent bank statements showing savings history and spending patterns
• Income verification through payslips, tax returns, and employment confirmation
• Details of existing debts and financial commitments
• Property research documentation, including rental appraisals and purchase contracts
• Investment property portfolio information if you own other rental properties

Many lenders now offer a streamlined application process for investment loans, particularly for experienced property investors. However, first-time investors should expect more detailed scrutiny of their investment property loan application.

Interest Rate Considerations and Loan Features

When comparing investment loan options, consider both the headline interest rate and additional features:

Variable Rate Benefits:
• Potential for interest rate discounts based on loan size or banking relationship
• Flexibility to make additional repayments
• Access to offset accounts and redraw facilities

Fixed Rate Advantages:
• Certainty in repayment amounts for budgeting purposes
• Protection against interest rate rises during the fixed period
• Suitable for investors preferring predictable cash flow

Property Investment Strategy Considerations

Successful property investment requires more than just securing finance. Consider these strategic elements:

• Property Type Selection: Whether a town house, apartment, or stand alone dwelling aligns with your investment goals
• Location Research: Understanding local property markets, rental demand, and growth prospects
• Rental Yield Analysis: Ensuring projected rental income supports your investment objectives
• Long-term Portfolio Planning: How this purchase fits within your broader investment property portfolio strategy

Working with Mortgage Professionals

Negotiating investment loan terms and comparing options across multiple lenders requires expertise and market knowledge. Professional mortgage brokers can help you access investment loan options from banks and lenders across Australia, potentially securing better terms than approaching lenders directly.

At Simple Lending, we understand that invest in real estate requires careful planning and the right finance structure. Our team can help evaluate your borrowing capacity, compare investment loan options, and guide you through the application process for your established property purchase.

Call one of our team or book an appointment at a time that works for you to discuss your investment property loan requirements and explore the finance options available for your next property purchase.