Investment Property Loans

Understanding Investment Property Loans

An investment property loan is financing acquired to purchase a rental or investment property, or a loan where the secured asset is used for investment purposes. Unlike home loans for a primary residence, investment loans in Australia generally come with higher interest rates and stricter loan-to-value ratio (LVR) limits. For instance, while many lenders allow homebuyers to borrow up to 95% of a property's value, investment loans are typically capped at 90%.

Types of Home Loan Repayments

• Principal and Interest Home Loans

With this type of home loan, your repayments cover both the amount borrowed (the principal) and the interest charged by the lender. This means your repayments remain stable unless there are changes in the interest rate or additional fees.

• Interest-Only Home Loans

Interest-only loans require borrowers to pay only the interest for a set period (typically 1–5 years) before transitioning to principal and interest payments. While the initial repayments are lower, they increase significantly once the principal repayments begin. This option is more commonly used by property investors rather than owner-occupiers.

How Do Investment Loans Operate?

Investment property loans function like other types of mortgages—borrowers receive a loan and make regular repayments, which include interest. These loans are specifically for purchasing or refinancing investment properties. Repayment options include principal and interest or interest-only structures, with interest-only terms usually limited to the first five years. The deposit can come from savings or be secured by existing property equity, potentially enabling borrowers to cover 100% of the purchase price plus associated costs. Rental income from the property may be considered in the loan application, but lenders typically adjust the value to account for vacancies and ownership costs.