Choosing to invest in property is a big step. With the right knowledge and tools, we can help you plan your investment
Research and having the right people to help you are the keys when investing in property.
It definitely pays to do your homework on the property market before you dive in, and we’re thrilled to be on board to help you when it comes to financing your decision. Recent share market slides, tight rental markets in most capital cities and a whiff of increase in property prices are seeing many mum and dad investors retreat to bricks and mortar.
Generally, property in Australia is still considered to be a sound investment due to steady and consistent increases over time.
But it’s not a quick win. Property usually has a seven to ten year cycle, with highs, lows and steady stints in between.
Fortunately, an ongoing housing shortage in Australia and a tax system that allows negative gearing on property (where any investment losses can be claimed as tax deductions) continue to favour housing as a solid, long-term investment.
But credit has tightened in the wake of the Global Financial Crisis so lenders are more cautious about who borrows and for what. We are here to help find the right lender and loan for your circumstances in this new environment. We can also wade through the many investment loan options on offer, leaving you more time to find the ideal property.
Here are some tips to help you find the right rental and reap the most rewards
House prices often increase in bigger strides than units, offering more potential for capital gain over time. But a rental home also comes with added responsibilities, including gardens and lawns (and sometimes a pool) to maintain.A unit or townhouse may not increase in value as quickly, but they are generally easier to maintain and may even be easier to rent for that very reason, depending on location, condition and size.
Of course, you’ve heard this before. But location can mean different things when it comes to rental properties. Renters are often looking for maximum convenience so consider properties near schools, major shopping centres and public transport.
Spend plenty of time researching target areas, including recent property price movements and future predictions, rental vacancy rates and any proposed infrastructure improvements. You should also do some scouting as if you were a renter to get a first-hand look at the local market.
One of the worst mistakes you can make with any investment is to buy with your heart instead of your head. Remember, your rental property is not your ‘home sweet home’.
A well-presented property is desirable, but think sensible, not swank.Ideally, you want a neutral interior colour scheme, serviceable and resilient flooring and window coverings, a low-maintenance yard and good storage. And if buying an older styl unit, look for one with an internal laundry, a garage or car space and few stairs (unless there’s a great view to be had higher up, which can add to the property value).
An investment property requires regular financial commitment beyond the loan repayments. Make sure you have the capacity to cover land and water rates and any maintenance and repair costs. Tenants are entitled to repairs or replacements as quickly as possible under their rental agreement, so you will need to have the means to pay.
Apartments or units also come with body corporate fees, which can run to thousands in some modern complexes with professional landscaping and shared amenities, such as swimming pools.
Many property investors take advantage of interest-only loans because interest payments are tax deductible. That means you’re taking a punt that the property’s value will increase over time, leaving you with a financial gain in the long run.
This is a good strategy for high income earners who are taking advantage of negative gearing. If you choose to positive gear your investment (i.e. generate a profit from the rental income after costs), you might want to consider a principal and interest loan and use the profit to shave off the principal.
Just remember, you will pay tax on any income from your investment. Talk to your accountant about your tax situation so your broker can find the right loan.
Managing a property takes time and energy. If you don’t have much to spare of either, you should get a professional property manager to advertise the rental, screen and select tenants, collect and pay the rent, co-ordinate repairs and maintenance, provide condition reports and manage any disputes. Ask other local landlords for referrals for reputable managers.
You should also conduct twice-yearly inspections yourself. Any associated costs, including travel and accommodation, are tax deductible.
If you decide to self-manage, you will need to be well-versed on tenancy laws and prepared to organise repairs, including those that arise after hours.
We understand every borrower has unique circumstances – and that some are more complex than others. We know from vast experience which lenders will work with investment customers who have more complicated requirements, and will negotiate on your behalf.
The ATO will give you a discount off your tax bill for wear and tear on property. It’s known as depreciation, and can be a very handy windfall for investors, especially if you buy a new property.
The formula is quite complex and depends on the age of your property, building materials and the various fittings. That’s where a professional quantity surveyor comes in. For a fee (often around $600), they’ll assess the property and complete a Tax Depreciation Schedule, which your accountant will incorporate in your tax return.
If you need both incomes to be considered in the lending equation, speak with us to get the right advice on the best ownership equation for your circumstances
Different Loan Types
Standard variable loans are the most popular home loan in Australia. Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia and funding costs and the individual decisions of each lender. Your regular repayments generally pay off both the interest and some of the principal.
You may also be able to choose a basic variable loan, which offers a discounted interest rate but has fewer loan features, such as a redraw facility and repayment flexibility.
- If interest rates fall, the size of your minimum repayments will too.
- Standard variable loans generally allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
- Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.
- If interest rates rise, the size of your repayments will too.
- Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
- You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
- If you have a basic variable loan, you may not be able to pay it off quicker or get access to money you have already repaid if you ever need it.
The interest rate is fixed for a certain period, usually the first one to five years of the loan. This means your regular repayments stay the same regardless of changes in interest rates. At the end of the fixed period you can decide whether to fix the rate again, at whatever rate lenders are offering, or move to a variable loan.
- Your regular repayments are unaffected by increases in interest rates.
- You can manage your household budget better during the fixed period, knowing exactly how much is needed to repay your home loan
- If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
- You can end up paying more than someone with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period.
- There is very limited opportunity for additional repayments during the fixed rate period.
- There may be significant break costs that you must pay if you exit the loan before the end of the fixed rate period.
Split rate loans
Your loan amount is split, so one part is variable, and the other is fixed. You decide on the proportion of variable and fixed. You enjoy some of the flexibility of a variable loan along with some of the certainty of a fixed rate loan.
- Your regular repayments will vary less if interest rates increase, making it easier to budget.
- If interest rates fall, your regular repayments on the variable portion will too.
- You can generally repay the variable part of the loan quicker if you wish.
- If interest rates rise, your regular repayments on the variable portion will too.
- Your additional repayments of the fixed rate portion will be limited.
- There may be significant break costs that you must pay if you exit the fixed portion of the loan early.
You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not also paying off the principal, your monthly repayments are lower. At the end of the interest-only period, you begin to pay off both interest and principal. These loans are especially popular with investors who plan to pay off the principal when the property is sold. This strategy is usually reliant on the property having achieved capital growth before it is sold.
- Lower regular repayments during the interest only period.
- If it is not a fixed rate loan, there may be flexibility to pay off, and possibly redraw, the principal at your convenience during the interest-only period.
- The overall cost of the loan is likely to be significantly higher.
- At the end of the interest only period you have the same level of debt as when you started.
- If you’re not able to extend your interest-only period your repayments will increase at the end of the interest-only period.
- You could face a sudden increase in regular repayments at the end of the interest-only period.
Line of Credit
You can pay into and withdraw from your home loan every month, so long as you keep up the regular required repayments. Many people choose to have their salary paid into their line of credit account. This type of loan is good for people who want maximum flexibility in their access to funds.
- You can use your income to help reduce interest charges and pay off your mortgage quicker.
- Provides great flexibility for you to access available funds.
- Simplifies your banking into one account
- Without proper monitoring and discipline, you won’t pay off the principal and will continue to carry or increase your level of debt.
- Line of credit loans usually carry higher interest rates than a standard variable mortgage.
Originally designed for first-home buyers, but now available more widely, introductory loans offer a discounted interest rate for the first 6 to 12 months, before the rate reverts to the usual variable interest rate.
- Lower regular repayments for an initial ‘honeymoon’ period.
- Loans may have restrictions, such as no redraw facilities, for the entire length of the loan.
- When the honeymoon rate period ends a homeowner may be locked into an interest rate that is not as competitive as elsewhere.
- Some banks may charge early termination fees if you decide to switch to a new lender.
Popular with self-employed people, these loans require less documentation or proof of income than most, but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk. In most cases you will be financially better off getting together full documentation for another type of loan. But if this isn’t possible, a low doc loan may be your best opportunity to borrow money.
- Lower requirement for evidence of income.
- You will probably pay higher interest than with other home loan types, or may need a larger deposit, or both.
Here’s a guide to common loan features and benefits
Of course, not all of these features will be available on every loan. You can ask us about any that interest you.
Interest Only Repayments
You only pay the interest on the loan, not the principal, usually for the first one to five years although some lenders offer longer terms. Some lenders give borrowers the option of a further interest-only period. Because you’re not paying off the principal, your monthly repayments are lower. These loans are especially popular with investors who pay off the principal when the property is sold. This strategy is usually reliant on the property having achieved capital growth before it is sold.
If you pay more than the required regular repayment, the extra amount may be deducted from the principal. This not only reduces the amount you owe but lowers the amount of interest you repay. Making extra repayments regularly, even small ones, is the best way to pay off your home loan quicker and save on interest charges.
Weekly or Fornightly Repayments
Instead of a regular monthly repayment, you pay off your home loan weekly or fortnightly. This can suit people who are paid on a weekly or fortnightly basis, and will save you money because you end up making more payments in a year, cutting the life of the loan.
This typically allows you to access any extra repayments you have made. Knowing you have access to funds can provide peace of mind. Be aware lenders may charge a redraw fee and have a minimum redraw amount. There might also be other restrictions on when funds can be redrawn.
You may be able to take a complete break from repayments, or make reduced repayments, for an agreed period of time. This can be useful for travel, maternity leave or a career change.
This is a savings account linked to your home loan. Money paid into the savings account is deducted from the balance of your home loan before interest is calculated. The more money you save, the lower your regular home loan repayments. You can often access your savings in the usual way, by EFTPOS and ATMs. This is a great way to reduce your loan interest, as well as eliminate the tax bill on your savings. Be aware the account may have higher monthly fees or require a minimum balance or have other restrictions.
Your lender automatically draws repayments from a chosen bank account. Apart from ensuring there is enough cash in the account, you don’t have to remember to make repayments.
All in one home loan
This combines a home loan with a cheque, savings and credit card account. You can have your salary paid into it directly. By keeping cash in the account for as long as possible each month you can reduce the interest charges. Used with discipline, the all-in-one feature offers both flexibility and interest savings. Interest rates charged for these loans can be higher.
Home loans over a certain value are offered at a discounted rate, combined with discounted fees on other banking services. These can be attractively priced, but if you don’t use the banking services you may be better off with a basic variable loan.
If you sell your current property and buy somewhere else you can take your home loan with you. This can save time and set-up fees, but you may incur other charges.
Let’s buy a home together.
It’s a big decision, so it’s good to have someone there to help you make the right one.
Buying a home is one of the biggest things you’ll do in life. We’re here to help you by making sure you have the info and options you need to find the finance solution you’re looking for (for the house you want).
There are so many home loans to choose from, with new ones always being introduced, not to mention special offers and other ‘deals’. As a broker we’ll not only help you find a loan that suits your particular needs, but we’ll also help you complete the paperwork, and submit the application for you.
It’s why more than half of Australian borrowers now use a broker to secure a home loan.
Before you use a broker you might like to get a better understanding of what’s available by visiting our Different Loan Types page.
If you want to get a better idea of your borrowing power and what your likely repayments might be, try out our online calculators.
At anytime on your home buying ‘journey’, feel free to give us a call or email us and we’ll do everything we can to make it easier for you.
A general list of investing FAQ
Why invest in property?
Capital growth. Capital growth is the increase in value of property over time and the long term average growth rate for Australian residential property is about 9% a year. Importantly, because property markets move in cycles, property values go through periods of stagnation as well as decline. This is why taking an investment view of at least 10 years is important. Note: if your investment property increases by 7.5% a year, over a 10 year period it will double in value.
Rental income. Rental income, also known as yield, is the rent an investment property generates. You can calculate this by dividing the annual rent by the price paid for the property and multiplying it by 100 to produce a percentage figure. As a general rule, more expensive properties generate lower yields than more moderately priced properties. There is also usually a direct, inverse relationship between capital growth and rental income. Those properties producing a lower rental yield will often deliver greater capital growth over the long term.
Tax benefits. The Federal Government allows you to offset against your taxable income any losses you incur from owning an investment property. For example, if the amount you receive in rent from tenants is $5,000 less than the cost of servicing the mortgage, and paying rates, water and other fees associated with the property, at the end of the year you can add that $5,000 to the amount of income on which you don’t have to pay tax. If you work as an employee, with income tax automatically deducted from your pay, this means you’ll receive a refund from the Australian Taxation Office (ATO) after the end of the financial year.
Low volatility. Property values generally fluctuate less than the stock market. Many investors say they experience greater peace of mind for this reason.
Leverage. Property enables far greater leverage than many other investments. For example, if you have $100,000 in savings, you could invest it in a portfolio of shares, or use it to buy a property worth $500,000 by taking out a mortgage for $400,000. If shares go up by 10% during the year, your share portfolio would be worth $110,000 and you would have gained $10,000. If property goes up by 10% during that same year, your property would be worth $550,000 and you would have gained $50,000.
You don’t need a big salary to invest. If you are buying to invest, lenders will take rental income as well as your own income into their assessment. If you already own your own home and have some equity in it, you may be able to use this as a deposit, meaning that you can buy an investment property without having to find any additional cash. If you don’t own your own home and feel you may never be able to afford one, buying an investment property may be a good stepping stone to one day being able to afford your own home.
How much money can I borrow?
We’re all unique when it comes to our finances and borrowing needs. Get an estimate on how much you may be able to borrow (subject to satisfying legal and lender requirements) with our selection of calculators. Or contact us today, we can help with calculations based on your circumstances.
How do I choose a loan that’s right for me?
Our guides to loan types and features will help you learn about the main options available. There are hundreds of different home loans available, so talk to us today.
How much do I need for a deposit?
Usually between 5% – 10% of the value of a property, which you pay when signing a Contract of Sale. Speak with us to discuss your options for a deposit. You may be able to borrow against the equity in your existing home or an investment property.
How much will regular repayments be?
Go to our Repayment Calculator for an estimate. Because there so many different loan products, some with lower introductory rates, talk to us today about the deals currently available, we’ll work with you to find a loan set-up that’s right for you.
How often do I make home loan repayments — weekly, fortnightly or monthly?
Most lenders offer flexible repayment options to suit your pay cycle. Aim for weekly or fortnightly repayments, instead of monthly, as you will make more payments in a year, which will shave dollars and time off your loan.
What fees/costs should I budget for?
There are a number of fees and costs involved when buying a property. To help avoid any surprises, the list below sets out many of the usual costs:
- Stamp duty — This is the big one. All other costs are relatively small by comparison. Stamp duty rates vary between state and territory governments and also depend on the value of the property you buy. You may also have to pay stamp duty on the mortgage itself. To estimate your possible stamp duty charge, visit our Stamp Duty Calculator.
- Legal/conveyancing fees — Generally around $1,000 – $1500, these fees cover all the legal requirements around your property purchase, including title searches.
- Building inspection — This should be carried out by a qualified expert, such as a structural engineer, before you purchase the property. Your Contract of Sale should be subject to the building inspection, so if there are any structural problems you have the option to withdraw from the purchase without any significant financial penalties. A building inspection and report can cost up to $1,000, depending on the size of the property. Your conveyancer will usually arrange this inspection, and you will usually pay for it as part of their total invoice at settlement (in addition to the conveyancing fees).
- Pest inspection — Also to be carried out before purchase to ensure the property is free of problems, such as white ants. Your Contract of Sale should be subject to the pest inspection, so if any unwanted crawlies are found you may have the option to withdraw from the purchase without any significant financial penalties. Allow up to $500 depending on the size of the property. Your real estate agent or conveyancer may arrange this inspection, and you will usually pay for it as part of their total invoice at settlement (in addition to the conveyancing fees).
- Lender costs — Most lenders charge establishment fees to help cover the costs of their own valuation as well as administration fees. We will let you know what your lender charges but allow about $600 to $800.
- Moving costs — Don’t forget to factor in the cost of a removalist if you plan on using one.
- Mortgage Insurance costs — If you borrow more than 80% of the purchase price of the property, you’ll also need to pay Lender Mortgage Insurance. You may also consider whether to take out Mortgage Protection Insurance. If you buy a strata title, regular strata fees are payable.
- Ongoing costs — You will need to include council and water rates along with regular loan repayments. It is important to also consider building insurance and contents insurance. Your lender will probably require a minimum sum insured for the building to cover the loan.