Like to Invest
When it comes to making the most of an investment property, finding the right home in the right location is only half the battle; finding the best finance is the other half. Many options are available and the choice of home loan will ultimately depend on your particular investment strategy and the type of property.
Here are the three main options:
- Standard Variable Rate or Fixed Rate Home Loan
Depending on your circumstances, most lenders will let you borrow up to 95% of the purchase price of the investment property. You may, however, be required to take out lenders mortgage insurance.
- Interest Only Home Loan
With an interest only home loan, repayments cover only the interest component. The principal is repaid in full at the end of the loan term (usually three to five years). As borrowers only repay the interest component, interest only loans have lower repayments than principal and interest loans.
- Equity Home Loan
If you already own or substantially own your own home, you can borrow against the equity you have accumulated. Equity is simply the difference between what your property is worth and what you owe. For example, if you have $100,000 to pay off on a home worth $500,000, you have $400,000 worth of equity. An equity home loan gives you a line of credit on your mortgage up to your approved amount. The loan can be taken in full or in stages, making it particularly useful in property investing.
Property Invester’s Tips
Without a doubt, the major investment for home equity borrowers in another property. Though Australians have long enjoyed a love affair with property it’s a little more than that.
The modern investor is more educated about risk, return and investment options. So when it comes to risking the family home on an investment, you would want a fair return for a reasonable risk-preferably, an investment that is “as safe as houses”.
In order not to erode the equity in the family home, it’s a good idea to put the money from a home equity loans towards the purchase of assets rather than using it for a holiday, a car or other non-appreciating purchases.
One of the dangers of taking out a home equity loan is the added repayment burden many undisciplined borrowers find too hard to bear.
Although the intention may be good, temptation often steps in and the easily accessed funds are soon frittered away, leaving behind a bigger debt and undoing years of patient saving. One possibility borrowers never seem to think about is that their investment property may not significantly increase in value, the way their first home did.
Choosing an investment means finding a property that is attractive to renters and future buyers. Too often, borrowers rush out and buy a property that they would like to live in but t may not have the same resale attraction to other buyers.
So if you are going to go down this path, make sure you choose a better quality property, which many potential buyers will find attractive.