REASONS WHY YOU MIGHT CONSIDER AN INVESTMENT PROPERTY
There are a few good reasons why investing in property is a good idea, however it could be costly if you aren’t prepared. Always remember when purchasing an investment property, it is not a house you have to live in, so there shouldn’t be as much emotional attachment as with your own home. There are more benefits to investing than just tax savings, an additional property helps to build your nest and strengthen your asset position. Consider the benefits and risks to help you decide if it’s the right option for you. Here are some reasons to consider purchasing an investment property:
NEGATIVE GEARING AND TAX BENEFITS
When your costs (for example loan interest, property management fees, maintenance) are larger than your return (rent), then this is called negative gearing and you can potentially claim this difference as a tax deduction. You may also be able to claim the stamp duty you pay on the property as a tax deduction, as well as any depreciation. In time, your property may become a positive cash flow, so you will not have to contribute anything to its upkeep, however you may have to pay tax on your earnings.
Over time, it is common for property prices to increase, which in turn improves your equity position. If you choose a property close to a major CBD, schools, freeway access and leisure facilities, your property is likely to grow in value in a good market. This equity can then be used to purchase additional properties in the future, or is your profit when you eventually sell!
SOMEONE ELSE PAYS IT OFF
What a nice idea to think that someone else is paying off your mortgage for you! When you have an investment property, the rental payments you receive may potentially cover the majority of the mortgage repayments (and in some cases, be more than your repayments!), which in turn is paying off your mortgage with little effort.
While retirement might feel like a long way away, it is important to ensure you are looking after your future finances. Investing in property could potentially be useful for your retirement. If you make the right investment you could potentially live off the rental payments (as your loan would be decreasing over time), or you could sell the property at retirement and use the proceeds to maintain your lifestyle.
Understanding the risks: like any investment, there are risks involved. Some of the risks may include (but are not limited to) the income may not meet your expectations, your property value could decline or you may not be able to sell the property when you want. It is important to consider all your options before making a decision.
HOW CAN I CHOOSE THE RIGHT INVESTMENT HOME LOAN?
Once you know you fulfill the requirements when it comes to the amount you’re looking to borrow, it’s time to think about the type of investment property loan you’ll sign up with. One of the more popular options is choosing an interest only home loan. Read on for a full definition:
VARIABLE, FIXED OR SPLIT INTEREST RATE?
Whether you choose an interest only investment loan or the standard principal and interest repayments, you’ll be able to choose the type of interest rate to suit you.
- Variable interest rate: The more popular option in Australia is the variable rate option, which changes according to the economy. The reason many investors opt for variable rate home loans is because they generally come with greater flexibility than fixed rate loans like an 100% offset account (see below for a full definition), which allows you to bring down the amount of interest you pay.
- Fixed interest rate: By comparison, a fixed interest rate will mean your rate is locked in for the fixed rate period. While more and more providers are introducing fixed rate loans with an extra repayments facility (with a cap of around $10,000 per annum), fixed rate loans generally don’t come with an offset account.
- Split interest rate: You could also consider splitting your investment loan, which means a portion will be variable allowing you to enjoy the benefits of an offset account on the variable amount and the remainder will be fixed giving you some security if your lender lifts rates.
ARE OFFSET ACCOUNTS IMPORTANT FOR INVESTMENT LOANS?
Yes, once you’re signed up with an investment property loan, it’s a smart move to get your salary deposited into an offset account linked to your mortgage, rather than a bank account because you’ll reduce the amount of interest you pay.
WHAT FEES WILL I PAY ON AN INVESTMENT LOAN?
Just like any other home loan, there are some fees to watch out for when taking out an investment home loan. Here are the common charges:
Upfront fee: When you apply for an investment loan, the bank will have to run a credit check on you to see if you are a risky borrower. To cover this cost and any administration costs involved in assessing you for the investment property loan you may be charged a one off upfront fee anywhere between $0-$800.
Ongoing service fees: There may also be a small ongoing fee of around $10 that the lender charges for providing you with the loan.
Breakcost fees: Banned on variable rate loans back in 2011, breakcost fees can still be charged if you try to pay out a fixed rate loan early.
WHAT DOCUMENTS WILL I NEED TO APPLY FOR AN INVESTMENT HOME LOAN?
Each bank or financial lender will ask for different documentation when you apply for one of their investment loans, however generally they will require:
- Identification: The provider will want to know who you are by obtaining a certified copy of documents like your passport, Australian driver’s licence, birth certificate, medicare and utility bills.
- Income: They will want to determine whether you can comfortably service the investment home loan by seeing your latest PAYG Payment Summary from your employer, as well as your contract outlining your salary and a letter from your employer confirming the length of time you’ve held a position at the company.
- Existing loans: If you have a credit card or personal loan you’re paying off, then the lender will usually ask for around 1-3 months worth of statements.
- Genuine savings: You’ll also be asked to provide around 3 months worth of bank and savings account statements, so that they can see you are a diligent saver.