Property investment loans are not too different from regular home loans. As with other loans you can choose between:
Variable Interest Rate
Here the rate you pay fluctuates typically in line with changes to the official cash rate. This type of loan tends to have a range of flexible features like redraw however as investors can usually claim the loan interest as a tax deduction there may not be much incentive to pay off the loan sooner. So the features of a variable rate loan may not appeal to investors as much as they do to owner occupiers.
A fixed rate is often very useful for investors as it provides certainty of repayments. This can be helpful because the rent payments on a property will be fixed during the lease term, and even if market interest rates rise the landlord may not be able to raise the rent until the lease expires. By locking into a fixed interest rate investors have more certainty about the repayments on their property and a more manageable cash flow.
Like home owners, an investor can choose to split their loan between fixed and variable rate components.
There are two types of loans that tend to be particularly attractive to investors:
Interest only loans
Line of credit loans
With most standard home loans your repayments are made up of interest charges plus a small repayment of the loan balance. In this way you slowly chip away at the original amount borrowed over the term of the loan.
Where an interest only period is present the loan principle remains the same unless you choose to make additional payments. You only have to pay the original amount borrowed if you sell the investment property or if the interest only period expires.
This type of loan is useful for investors because during the interest only period of the loan:
Your monthly repayments are less than they would be if you were to pay off principal as well
You can get a tax deduction for the interest payments, but not for principal repayments
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