When it comes to financing property investments, not all loans are created equal. An investment loan has unique features and options, each influencing your cash flow, tax deductions, and, ultimately, your investment’s potential returns. Choosing a loan that aligns with your property investment strategy can save you money, boost cash flow, and create greater flexibility, and be suitable for you as an Australian expat.

In this post, we’ll break down the most important features to look for in an investment loan, helping you understand how each can impact your bottom line. Whether you’re new to property investment or looking to refinance an existing loan, these key loan features will guide you toward a smarter choice.

1. Interest Rate Type: Fixed vs. Variable

One of the biggest decisions in choosing an investment loan is deciding between a fixed or variable interest rate. Let’s explore the differences and benefits of each.

Fixed-Rate Loans
A fixed-rate loan means your interest rate stays the same for a set period, typically between one and five years. The primary benefit of a fixed-rate loan is certainty: you know exactly what your repayments will be, which can help with budgeting and cash flow. Fixed rates are particularly popular during periods of rising interest rates, as they can protect you from rate hikes. However, keep in mind that you may miss out on rate drops and often face penalties if you try to make extra repayments.

Variable-Rate Loans
A variable-rate loan fluctuates with the market interest rate, meaning your repayments can go up or down. The advantage of a variable rate is flexibility. If rates decrease, so do your repayments, and most variable loans allow you to make additional repayments without penalties. However, if rates increase, your repayments will follow suit. Variable rates can be a good option for investors who want flexibility and the potential to save on interest costs during favourable market conditions.

Split Loans
A split loan combines both fixed and variable rates, giving you a bit of stability and flexibility. For example, you might lock in a fixed rate for half the loan while keeping the other half variable. This option allows you to benefit from rate drops while having the stability of fixed repayments on part of the loan. It’s a middle-ground solution for those seeking a balance between security and flexibility.

2. Offset Account Facility

An offset account is a powerful feature for investors looking to save on interest. Here’s how it works: An offset account is a transaction account linked to your loan. The balance in this account offsets the amount you owe on your loan. For example, if you have a $300,000 loan and $20,000 in your offset account, you’ll only be charged interest on $280,000. This setup can significantly reduce your interest costs over time.

An offset account also provides flexibility. You can deposit and withdraw funds as needed, making it an excellent option for managing cash flow, and allowing you to avoid impacting the tax deductibility of your loan. Unlike extra repayments, which can be harder to access, the funds in an offset account are available whenever you need them. This feature can be particularly beneficial for tax efficiency, as you can reduce interest without affecting your tax deductions on investment property loans.

3. Redraw Facility

A redraw facility is similar to an offset account but with some differences. With a redraw facility, you can access any additional repayments you’ve made on your loan. For example, if you’ve paid extra into your loan and need access to those funds, you can “redraw” them. However, unlike an offset account, a redraw facility typically comes with restrictions, such as minimum redraw amounts, fees, or limited redraws per year.

A redraw facility can be useful for investors who want to pay down their loan faster but still have access to extra funds if needed. However, be sure to check if there are any restrictions or fees associated with redrawing, as these can vary between lenders. It's also important to be aware of any impacts to tax deductibility with your loans, as often an offset account can be a better move than a redraw facility.

4. Loan Flexibility and Repayment Options

Different types of loans come with various repayment structures, and the right one for you will depend on your cash flow needs and investment strategy.

Interest-Only Loans
Interest-only loans are popular among investors because they reduce monthly repayments by allowing you to pay only the interest, rather than the principal, for a set period (typically between one and five years). This lower repayment amount can improve cash flow, which can be beneficial if you’re looking to reinvest or cover expenses related to the property. However, be cautious: interest-only loans don’t build equity as quickly, and once the interest-only period ends, your repayments will increase as you begin paying down the principal.

Principal and Interest Loans
With a principal and interest loan, you repay both the interest and part of the principal with each repayment. This option can help you build equity in your property faster and pay off your loan sooner. It’s a good choice if you’re looking for a more long-term approach to investment, where building equity is as important as generating cash flow.

Extra Repayments
Some loans allow you to make additional repayments on top of your regular payments, which can significantly reduce the loan term and save thousands in interest. If flexibility is important to you, look for a loan that allows extra repayments without penalties.

5. Loan Portability

Loan portability allows you to transfer your existing loan to a new property without having to close it and take out a new one. This can be a cost-saving feature, as it lets you avoid exit fees, break costs, and application fees on a new loan. Portability is a great option if you’re planning to sell one investment property and purchase another, as it streamlines the process and reduces costs. However, keep in mind that not all loans are portable, and certain restrictions may apply.

6. Loan-to-Value Ratio (LVR) and Deposit Requirements

Loan-to-Value Ratio (LVR) is the percentage of the property’s value that you’re borrowing, and it plays a big role in determining your borrowing power, interest rate, and whether you’ll need to pay Lender’s Mortgage Insurance (LMI).

LVR Impacts on Interest Rates and LMI

A lower LVR, meaning a higher deposit, typically results in lower interest rates and may exempt you from paying LMI, which can be a significant saving. For example, if you’re borrowing 80% of the property’s value, you’ll likely avoid LMI, whereas borrowing 90% or more could require LMI, adding to your costs. It’s also important to note that different lenders will apply different LVR caps for Australian expats. For example, some will only allow a maximum of 60%, while others will allow you to borrow more than 80%.

While a higher deposit can reduce costs, it’s essential to strike a balance between a comfortable deposit and maintaining liquidity. A financial adviser or mortgage broker can help you determine the optimal LVR for your investment goals.

7. Fees and Charges

Loan fees can sometimes be the hidden cost of an investment loan, so it’s crucial to understand what fees apply. Common fees include:

• Application Fees: Charged to set up your loan, which can range from a few hundred to over a thousand dollars.
• Ongoing Fees: These might be monthly or annual fees that cover account maintenance.
• Exit Fees and Break Costs: If you decide to pay off the loan early or switch lenders, you could face exit fees. Fixed-rate loans often come with break costs, which can be substantial if you pay off the loan before the fixed term ends.

When comparing loans, consider the total cost over the life of the loan rather than just the interest rate, as fees can add up significantly.

8. Access to Professional Support and Guidance

Working with an experienced mortgage broker or financial advisor can provide a competitive edge in choosing the right investment loan. These professionals can assess your financial situation, discuss your investment goals, and identify loan features that align with your strategy. They’ll also help you navigate complex areas like tax implications and refinancing options, ensuring that the loan structure supports your long-term investment goals.

A mortgage broker can also negotiate with lenders on your behalf, potentially securing a better rate or loan features you may not have found on your own.

Conclusion

Choosing an investment loan is about more than just the interest rate. The features that come with a loan—such as an offset account, redraw facility, loan portability, and flexible repayment options—can have a lasting impact on your investment returns. By selecting a loan that supports your cash flow and aligns with your investment strategy, you can set yourself up for greater success.

Take the time to assess each loan feature, and don’t be afraid to ask questions or seek advice from a mortgage broker or financial adviser. Remember, a well-structured loan isn’t just a financing tool; it’s a crucial component of your property investment strategy. So, explore your options, and choose the loan that best supports your journey toward financial freedom through property investment.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.