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  • July 31, 2024

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

Utilising investment property loans to fund property investment has been a long-trusted method for accumulating wealth and establishing financial security in Australia. 

When it comes to financing a residential or commercial investment property, numerous challenges present themselves, especially in respect to  interest rates.

Understanding interest rates as they apply to investment property loans is essential for optimising investment returns and ensuring the financial future of your property investments.

Differences Between Interest Rates for Investment Property Loans 

Investment property loan interest rates are generally higher for commercial property investments than they are for residential property investments. 

One primary reason is the increased risk level that lending institutions associate with lending for the purchase of commercial  investment properties. 

Lenders perceive commercial investment properties as riskier because they are often subject to longer vacancy rates and wider fluctuations in demand over time. 

In contrast, a residential investment property is considered a lower risk due to normally low vacancy rates and an ongoing shortage of good rental stock in the Australian market.

Factors Affecting Interest Rates for Investment Property Loans

Several key factors influence the interest rates on investment property loans. Understanding these can help you better navigate the borrowing landscape and secure a favourable rate.

  • Borrower’s Credit Score

Your credit score is one of the foremost factors affecting whether or not you will qualify for the loan sought. 

Lenders vary in terms of how low a credit score they will accept before refusing to approve a loan application. Generally, the less impairment in your credit rating, the better your chances of obtaining loan approval. 

Therefore, having a good credit score is essential when seeking an investment property loan.

A few non-conforming lenders may offer investment property loans to borrowers with credit scores below that acceptable to mainstream lenders, however you will pay significantly higher interest rates than those offered by mainstream lenders.

  • Loan-to-Value (LVR) Ratio

LVR is the loan amount as a percentage of the property’s formally appraised value. A lower LVR generally leads to better loan terms and lower interest rates. A lower LVR means the borrower puts more money down, reducing the lender’s risk. Typically, lenders prefer an LVR of 80% or lower for investment properties. Borrowers with higher LVR may face higher interest rates or be required to purchase lenders mortgage insurance (LMI).

  • Type of Property

The type of investment property also influences loan interest rates. Residential investment property loans usually have lower interest rates than commercial property loans. This is due to the perceived risk levels as explained above.

  • Market Conditions

Broader economic and market conditions also influence interest rates. Inflation and overall economic health play a role in deciding the prevailing interest rates. During socio-economic instability or high inflation periods, interest rates tend to rise, making borrowing more expensive.

Investment Property Loan
Tips for Getting the Best Possible Interest Rate on Investment Property Loans

Securing the best interest rate on investment property loans involves careful planning and strategic decision-making. Here are some tips to help you achieve a favourable rate:

  • Increase Your Deposit

A larger deposit reduces the borrowed principal, leading to a lower LVR. This may help you secure a lower interest rate and eliminate any need for LMI (Lenders Mortgage Insurance). Aim for a deposit of at least 20-25% of the property’s purchase price if possible. This is especially important if you are dealing with a non-conforming lender, as they tend to shift borrowers with a high LVR to Near Prime products that come with higher interest rates.

  • Shop Around

Interest rates and loan terms may differ considerably between lenders. It’s essential to compare offerings from multiple financial institutions to find the best deal. While this process can be time-consuming, it can lead to substantial savings over the life of the loan.

  • Work with a Mortgage Broker

Mortgage brokers can be valuable confidants in any search for the most affordable investment property loans. They have access to a vast network of lenders and can help match you with the right loan product based on your financial situation and investment goals. Mortgage brokers can also assist with the loan application process, making it smoother and less stressful.

  • Consider Rate Locking

If you are considering a fixed rate investment property loan, consider securing it to protect yourself from potential rate increases before your loan settles. Rate locks can last up to 90 days and cost approximately 0.15% of the value of the loan with a minimum fee of around $600.00-$800.00. Note that rate locking is not available on variable rate loans.

The Bank or Broker Dilemma – Investment Property Loans

Bank or Broker?

When deciding whether to work directly with a bank or through the services of a mortgage broker, it’s essential to consider the advantages and drawbacks of each option.

  • Directly with a Bank

Working directly with a bank can be straightforward, especially if you have an existing relationship with the institution. Banks may offer loyalty discounts or more favourable terms to long-standing customers. However, this approach requires more legwork from you, as you’ll need to contact multiple banks to compare rates and terms to ensure your bank is really offering you the best deal.

  • Through a Mortgage Broker

Mortgage brokers act as middlemen, connecting borrowers with lenders. They have access to many lenders and a vast array of loan products and can help you find the best deal for your needs. Additionally, brokers can handle the necessary paperwork and communicate with lenders, saving you time and effort. 

For straight-forward loans, most brokers do not charge borrowers for their services, as the lenders compensate them adequately. For more complex transactions requiring the provision of valuable credit advice and comprehensive communication between many parties to overcome barriers to loan approval, a broker may charge you a fee. Any such fee will vary depending on the complexity involved and the time required.

A lender can claw back fees paid to a broker for any mortgages discharged within two years, so if you are refinancing a previous mortgage less than two years old, your broker may charge you a fee to cover their lost commission from the previous loan.

An experienced mortgage broker such as Oz Lend (www.ozlend.com.au) can save you time, effort, and money throughout the lender selection, loan application, assessment, approval, and drawdown processes. 

As time is often of the essence when a property settlement is due and finance needs to be secured, a good mortgage broker can make a real difference to the outcome.

Securing the Right Investment Property Loan 

Securing an investment property loan with a favourable interest rate is crucial for maximising the return on your investment. 

Understanding the differences between interest rates for residential investment property loans and commercial investment property loans, the factors that influence these rates, and following the tips offered above, can significantly improve your chances of securing a competitive loan. 

Whether you work directly with a bank or through your mortgage broker, doing your homework and being proactive, will pay off in the long run.

When exploring investment property loans, you can rely on the experienced professionals at Oz Lend. Our expertise provides invaluable guidance and active support as you seek investment property financing.

Scheduling a meeting to discuss your specific needs can be the essential first step toward a successful investment property purchase. To learn more about Investment Property Loans, call us at 1300 438 669 or fill out this contact form https://www.ozlend.com.au/contact-us/

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