Interest Rates for Investment Property Loans – What You Need to Know

Using an investment property loan to buy real estate has been a trusted path to building wealth in Australia for a long time. There are plenty of lenders out there you can approach for investment property loans, all offering different interest rates and terms and conditions.

However, when attempting to finance a residential investment property, or a commercial space, things can get complex, mainly due to differing interest rates.

Knowing how these interest rates work is one of the most important parts of protecting your investment and making sure the numbers stack up in your favour.

How Interest Rates Differ for Investment Property Loans

 

Interest rates on investment property loans are not the same across the board. Interest rates for investment loans to purchase commercial properties are almost always higher than for residential investment properties.

Why? Because lenders see commercial properties as riskier. A shop, an office, or a warehouse can stay empty for months, and demand for them can change quickly.

On the other hand, residential properties are generally regarded as less risky by Lenders. Vacancies are shorter, and there is always demand for rental properties in Australia. That lowers the risk, and with it, the interest rates.

What Decides the Interest Rate on Your Investment Loan

Several things shape the rate you end up with. The better you understand them, the easier it is to borrow smartly, and keep costs down.

• • Your Credit Score

Your credit score is one of the first things lenders look at, especially when applying for investment property loans. Each lender has a cut-off for what they will accept. The higher your score, the better your chances and the lower interest rate you are likely to be offered.

If your score is low, you might still get investment property loans through what is called a non-conforming lender. However, this often means a much higher interest rate, which can negatively impact the profitability of your investment.

• • Loan-to-Value Ratio (LVR)

LVR is simply how much you are borrowing as a percentage of the property’s value. The lower the percentage, the safer it looks for the bank. An LVR of 80% or less is usually what lenders want to see. Go above that, and you may pay higher rates or be forced to pay expensive lenders’ mortgage insurance (LMI).

• • Type of Property

As mentioned earlier, residential loans usually come with lower interest rates than commercial ones. The kind of property you buy makes a big difference to what interest rate the bank offers.

• • Market Conditions

Rates also move with the economy. High inflation or unstable markets tend to push rates up, making loans more expensive.

Tips to Get a Better Rate on an Investment Property Loan

You cannot control everything, but there are ways to put yourself in the best position when it comes to the interest rate that you will be able to access.

• • Put Down a Bigger Deposit

The more cash you put upfront, the smaller your loan. That lowers your LVR, which helps you get a better rate and possibly skip LMI altogether. If you are dealing with non-conforming lenders, aim to contribute a deposit of 20–25% of the purchase price to avoid being pushed into higher-rate products.

• • Compare Lenders

Rates and terms are not the same everywhere. Take the time to shop around. Even a small difference in the interest rate obtained can save you thousands of dollars over the life of the loan.

• • Use a Mortgage Broker

A broker can do the legwork for you. They have access to a wide range of lenders and can match you with the right loan. Plus, they assist you in completing the loan application and smoothing out the application process to ensure timely outcomes.

• • Think About Rate Locking

If you are going for a fixed-rate loan, locking in your rate can protect you if rates rise before the settlement date. The lock usually lasts up to 90 days (about 3 months) and comes with a fee. This option does not apply to variable interest rate loans.

Bank or Broker – Which One Works Better?

There is no single answer here when it comes to investment property loans. Each option has its pros and cons.

• • ‘Going Direct to a Bank

If you already have a relationship with your bank, going directly might be simple. They might even give you a loyalty discount. But the downside is you will have to check what many other banks are offering, to be sure you are not missing a better deal.

• • Working With a Broker

Brokers open the door to a wider range of lenders, including those offering investment property loans. They can save you time and usually do not usually charge you directly for arranging investment property loans as lenders pay them for settled loans. For more complex and time-consuming loan applications, a broker may charge a fee b will be advised upfront.

One thing to keep in mind is if you decide to refinance and close the loan arranged by your broker too early, the broker might charge you a fee to recover the commission clawed back from them by the lender.

A broker like Oz Lend (www.ozlend.com.au) can guide you through the whole process, from choosing the lender to applying, getting approved, and settling. When deadlines matter, having someone experienced and having a solid understanding of investment property loans, can make a huge difference.

Finding the Right Investment Property Loan

Securing an investment loan with a solid rate is one of the biggest levers you have for making your investment property work for you.

Knowing the difference between residential and commercial rates, what factors drive them, and using the right strategies, can put you in a much stronger position.

Bank or broker, what matters is that you are active, do your research, and do not settle for the first offer.

Oz Lend has experts who can help you weigh your options and find a loan that works for your goals. A quick chat can set you on the right track for your next property investment.

For more on investment property loans, click on the link below to book your free consultation.