When buying an investment property, choosing the right loan structure is crucial for your long-term financial success. Variable rate investment loans offer flexibility and potential advantages that many property investors find appealing. Understanding how these loans work and their specific terms can help you make informed decisions about your property investment strategy.
Understanding Variable Interest Rates for Investment Properties
A variable interest rate on your investment loan means the rate can change over time based on market conditions and the lender's decisions. Unlike a fixed interest rate that remains constant for a set period, variable rates fluctuate with the Reserve Bank of Australia's cash rate and other economic factors.
When you invest in real estate using a variable rate loan, your monthly repayments will adjust as rates change. This means you could benefit from lower repayments when rates drop, but you'll also face higher costs when rates rise.
Key Features of Variable Rate Investment Loans
Variable rate investment loans typically offer several features that can benefit property investors:
• Offset accounts: Link your savings to reduce interest charges on your loan amount
• Redraw facilities: Access additional payments you've made above the minimum requirement
• Interest-only payment options: Pay only interest for an initial period to maximise cash flow
• No break costs: Switch to fixed rates or make extra payments without penalties
These property investment loan features provide flexibility in managing your investment property portfolio and can help optimise your rental yield.
Calculating Investment Loan Repayments
Calculating investment loan repayments with variable rates requires understanding that your payments will change over time. Your initial repayments depend on:
- The loan amount you borrow
- The current Investment Loan Interest Rate
- The loan term (typically 25-30 years)
- Whether you choose principal and interest or interest-only payments
For a rental property loan of AUD $600,000 at a variable rate of 6.50%, your monthly principal and interest repayments would be approximately AUD $3,789. However, this amount will vary as the interest rate changes.
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Loan to Value Ratio and Investment Lending
When applying for an investment loan, lenders typically require a lower loan to value ratio (LVR) compared to owner-occupier loans. Most lenders cap investment property loans at 80% LVR, meaning you'll need at least a 20% deposit plus costs.
If your LVR exceeds 80%, you'll likely need to pay lenders mortgage insurance (LMI), which adds to your upfront costs. This insurance protects the lender if you default on your loan.
The Application Process for Variable Rate Investment Loans
The investment loan application process involves several key steps:
• Research property: Identify suitable investment opportunities in your target market
• Assess borrowing capacity: Determine how much you can borrow based on your income and expenses
• Gather documentation: Prepare bank statements, tax returns, and proof of income
• Submit application: Complete the investment loan application with your chosen lender
• Property valuation: The lender arranges a valuation of your chosen property
• Approval and settlement: Finalise the loan and complete the property purchase
Whether you're buying your first investment property or expanding your existing portfolio, working with experienced professionals can help streamline the application process.
Variable Rates vs Fixed Rates for Investment Properties
Choosing between variable and fixed interest rates depends on your risk tolerance and market outlook:
Variable Rate Advantages:
• Potential to benefit from rate decreases
• Access to offset accounts and redraw facilities
• No break costs if you want to switch or make changes
• Often receive interest rate discounts for larger loan amounts
Fixed Rate Considerations:
• Predictable repayments for budgeting purposes
• Protection against rate rises during the fixed period
• Limited loan features during the fixed term
• Potential break costs if you need to make changes
Property Types and Investment Loan Considerations
Different property types may affect your loan terms and rates:
• Apartments: Often have higher strata fees but may offer stronger rental demand in certain areas
• Townhouses: Provide a balance between affordability and land content
• Stand-alone dwellings: Typically offer better capital growth potential but require higher initial investment
Lenders may have different policies for each property type, particularly regarding LVR limits and interest rates.
Additional Costs to Consider
When buying a rental property, factor in additional costs beyond your loan repayments:
• Stamp duty (varies by state)
• Legal and conveyancing fees
• Building and pest inspections
• Ongoing property management fees
• Insurance premiums
• Maintenance and repairs
These costs impact your overall return on investment and should be included in your property investment strategy planning.
Negative Gearing and Tax Implications
Many investment property owners use negative gearing as part of their strategy, where the property's expenses (including loan interest) exceed rental income. This creates a tax-deductible loss that can offset other income.
Variable rate loans can affect your negative gearing position as interest rate changes directly impact your deductible expenses. Rising rates increase your tax deductions, while falling rates reduce them.
At FinRoc Finance, we understand the complexities of investment property financing and can help you access investment loan options from banks and lenders across Australia. Our team works with clients throughout the Lower North Shore to find suitable variable rate investment loans that align with their property investment goals.
Whether you're purchasing an apartment in North Sydney, a townhouse in Cammeray, or expanding your investment portfolio, we can guide you through the application process and help you understand the implications of variable rate loan terms.
Call one of our team or book an appointment at a time that works for you to discuss your investment loan requirements and explore your options.
