How Does An Investment Loan Compare To Other Mortgages
Investment loan rates may be higher than the interest rates for similar owner-occupier home loans, due to the greater risk involved. This means its important to compare interest rates, fees, features and benefits of different investment mortgage options, to ensure you choose one that suits your needs.
Two loan types that are popular with investors include:
- Interest-only investment loans: For a limited time, your mortgage payments will only cover the interest charges and wont reduce the amount you owe. This can help keep your repayments more affordable until the interest-only period expires and the loan reverts to principal & interest repayments. Keep in mind that while interest-only repayments may cost you less in the short term, an interest-only period can mean it takes longer to pay off your investment property, costing you more in total interest charges over the life of the loan.
- Line of credit: A mortgage where you can use your equity in the property as security to borrow money. This line of credit works similarly to a credit card with a higher limit, so you can borrow and repay money as you need it, only paying interest on whats currently owing.
Before you apply for one of these loans, or other investment options, be sure to consider the features and benefits, as well as the interest rates, fees and other charges, and think about which repayment types and other options may provide the most value in your situation.
Best For Veterans: Veterans United Home Loans
Veterans United Home Loans
Why We Chose It: We chose Veterans United Home Loans as our best investment property lender for veterans because the firm specializes in VA-backed mortgages with experts who understand this loan program better than anyone else.
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Offers 24/7 customer service over the phone
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Has online application and pre-qualification
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Employs advisors from each branch of the armed forces
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Doesn’t offer home equity loans or HELOCs
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Information on FHA, USDA, and conventional loans is harder to find on its website
Founded in 2002, Veterans United is a full-service lender that specializes in VA loans for qualifying veterans, active service members, and their spouses. They are one of the largest VA mortgage lenders in terms of volume in the United States.
Investors benefit from flexible qualification guidelines, lower rates, and monthly payments, no down payments, and no private mortgage insurance. Veterans United has VA loans for as little as 0% down, and they understand how to make the VA loan work for an investor and still remain within the programs guidelines.
Among the products offered are fixed and adjustable-rate mortgages, jumbo loans, refinance loans, and cash-out loans. Loan rates range from 4.625% to 5.5%withAPRs between 4.991% and 6.117% depending on the loan product.
Special Mortgage Rules For Investment Properties
One of the advantages of buying an investment property is that you can typically add your anticipated rental income to your existing income when you apply. That will help you prove you can comfortably afford your new mortgage payments.
However, dont assume your lender will count all that extra income, nor that it will take your word for how much it will be.
Lenders typically allow 75% of the future rental income to count toward your qualifying income. And they require either a current lease agreement or a rental schedule, which will use the appraisers view of your likely rental income based on local comparisons with similar rental properties.
Youll likely need that extra income to qualify. Because your lender will want to be sure you can afford payments on your existing mortgage as well as your new loan.
When youre budgeting, also keep in mind that investment properties typically offer much more generous tax breaks than owner-occupied ones. So speak to your professional tax adviser to discover what those might mean to you.
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Remember Real Estate Is A Long Game
Big real estate investors, such as developers, buy properties to hold for years, through many up and down cycles.
My views are that if you are going to invest you should be a long-term holder, says developer Gino Nonni of Nonni Property Group.
I dont know how often you can buy something and then turn around and make a substantial profit in a short period of time. At minimum, mom and pop investors pay their mortgage down and typically the value of the asset will go up.
He believes the shortage of land will always constrain supply and put pressure on prices. The result is a secure, long-term investment.
Thats the way I view it, and thats what I tell my friends when they ask. I tell them to always hold.
Investment Strategies And Tips
While investing is always a risk, Australian property investors have some big advantages. For one thing, your investment expenses are tax deductible. Negative gearing means you can cut your tax bill if the investment loses you money in the short term.
But a bit of expert knowledge can help you make better investment decisions.
The biggest mistakes property investors make when it comes to financing their purchase
Michael Yardney is the founder and CEO of Metropole Property Strategists and a veteran property investor.
Property investment is a game of finance with some houses thrown in the middle
“Beginning investors think they can just go to any bank, get the lowest loan rate and they will be set. On the other hand, strategic investors don’t use finance to buy properties, they set up their finance to buy the time to ride the ups and downs of the property cycle so their investment properties can increase in value and give them the equity and cash flow to buy further properties.
“They do this by setting up cash flow buffers in facilities such as offset accounts so that they have the ability to pay for unexpected expenses or manage cash flow shortages.”
Focus on the long term
“This year the performance of our share market and the property markets, as well as the numerous pessimistic property predictions by the so called ‘experts’, reminded us that we should not make 30-year investment decisions based on the last 30 minutes of news.
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How Do I Compare Investment Loans
Property investors should consider the following when finding the ideal mortgage:
- Interest rate. For any borrower, a lower interest rate means lower repayments, which makes your investment property less expensive. But interest on investment loans is a tax-deductible investment expense, so getting the absolute lowest rate is less important than getting the right loan to suit your investment purpose.
- Fees and charges. Avoiding fees where possible can also help make your loan cheaper, but again, mortgage fees for investors are generally tax-deductible.
- Loan features. Mortgage features like an offset account can be very helpful, not to mention financially rewarding, if you know how to take advantage of them. It all depends on your investment strategy.
- LVR. Loan to value ratio is the amount you can borrow relative to the value of your investment property. An 80% maximum LVR means you need a 20% deposit. The smaller your deposit, the more you have to borrow, and the higher your costs will be.
- Borrowing capacity. Every lender will offer you a different amount of money, depending on their own policies, criteria and risk profile. Some may lend a lot more than others. It’s worth looking at multiple lenders to get an estimate of your borrowing power before deciding on one particular loan or lender.
What Is An Investment Property Loan
An investment property loan is money you borrow to buy or build a property that has the potential to produce income for you by leasing the space out to a tenant, or by re-selling it after you increase its value.
Investment property loans include construction, purchase, and rehab. Investment property loans are not just for single-family homes. If you want to buy an apartment building or an office tower, you would use an investment property loan.
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Can A Broker Get You Great Investment Loan Rates
A professional mortgage broker can help you find the best loan options for your financial situation, personal goals, and investment strategy. They may also have access to special investment mortgage deals that are exclusive to brokers. A broker can also negotiate with a lender on your behalf, so if you can show that youre a good borrower, you may be able to enjoy a cheaper interest rate on your investment mortgage, whether you’re investing for the first time or refinancing.
How Are Interest Rates Changing
Mortgage rates dropped to historic lows during the pandemic. These rates remained at a low point throughout 2020 and 2021, which led to a very competitive real estate market and sent demand for new properties soaring given historically low borrowing costs.
However, things have started to change as we move through 2022. Mortgage interest rates have moved upward at a sharp pace. The average rate for a 30-year fixed mortgage hit3.5% in the last week of January, making these the highest mortgage rates we have seen since the pandemic started.
The Federal Reserve expects to raise short-term interest rates throughout 2022. These rate increases are consistent with ongoing economic growth, which is also triggered by inventory shortages due to supply bottlenecks. They are also intended to combat the current spike in inflation, which remains one of the Feds key mandates. Higher interest rates will dissuade consumers from taking out loans, which will slow the economy down and eventually curb inflation. Both investors and would-be homeowners will need to prepare for these ongoing changes until the economy levels out by budgeting for higher interest rates when making investment decisions for properties.
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How Much Higher Are Mortgage Rates For Investment Properties
Mortgage interest rates will always be higher on rental and investment properties than on your primary residence.
How much higher? Technically, the answer to that question depends on the type of investment property, your creditworthiness, and your down payment.
But as a rule of thumb, you can expect the interest rate on your investment property to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.
As a rule of thumb, you can expect investment loan rates to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.
For example, todays live 30-year fixed rate as of September 10, 2022 is % , so the investment property rate would be around % to % .
Lenders add this upcharge because they consider rental and investment property mortgages to be a riskier loan product.
Mortgage borrowers tend to bail on rental properties before theyd bail on their primary residence if the going gets tough. Thus, these types of home loans are more likely to default during hard economic times.
To protect themselves against the extra risk that comes with investment property financing, lenders charge a higher interest rate and have stricter qualification rules for borrowers.
That makes it extra important to shop around and make sure youre getting a fair mortgage rate on your investment property before you buy.
How To Finance A Rental Property
Choosing a Loan Type
So, you are looking to finance a rental property and you want to compare investment or rental property mortgage rates. What are your options? You basically have three different types of rental loans, including:
Agency or qualified mortgage Bank portfolio mortgage Non-bank, non-qualifying mortgage
Agency Loans
An Agency Loan is eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac, often referred to as GSEs or government-sponsored enterprises. When you think of this type of mortgage, you should think about the process you underwent in obtaining the mortgage on the house you call your home.
You will qualify based on your ability to repay the loan from all of your sources of income along with the strength of your credit. As part of the underwriting process, youll need to provide pay stubs, tax returns , bank statements, retirement states, and brokerage statements.
Bank Loans
A Bank Loan is not eligible for sale to or guarantee by a GSE, so the bank has to hold the loan on their balance sheet in their own loan portfolio. Most local banks focus on financing commercial real estate and small businesses. Some allocate a portion of their assets for residential mortgage lending, including on rental properties. Often these loans are reserved for existing customers.
Non-QM Loans
If youre interested in beginning the rental property loan process, contact us today to get started.
Comparing Investment or Rental Property Mortgage Rates
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Current Average Investment Property Mortgage Rates
Investment property interest rates vary all the time. Its difficult to give a hard figure because not all lenders charge the same. Several factors influence how much a lender will charge, including income, debt, cash reserves, and credit score.
The majority of lenders typically increase standard property mortgage rates by 0.5% to 0.75% for investment properties.
For example, if you are taking out a primary mortgage, the average 30-year fixed interest rate may be 3.92%. The average 15-year fixed interest rate may be 2.97%.
So, what can you expect to pay based on current investment property mortgage rates?
The average interest rate for a 30-year fixed investment property mortgage may be 4.42% to 4.67%. For a 15-year fixed investment loan, you may expect to pay 3.47% to 3.72%. Again, this depends entirely on the lender in question, your current circumstances, and, especially, how much your down payment will be.
Its important to calculate your potential monthly repayments and your expected rental yield to determine whether youre likely to get approved for an investment loan.
How Does Tax Work On Investment Properties
Unlike owner-occupied home loans, the interest component of investment home loans can be tax-deductible as an investment expense. For this reason, many investors choose to take out interest-only home loans since they can completely claim the cost of their repayments as a tax deduction for the first few years.
If the expenses on your rental property, including the loan repayments, are greater than the income you earn from it then you can also claim negative gearing tax concessions. These allow you to offset this loss against your taxable income for that year.
Consult a registered tax agent or the Australian Taxation Office for more information on tax on your investment property.
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Other Details To Consider When Comparing Investment Property Mortgage Rates
Interest rates and fees are important when evaluating how to finance a rental property, but there are other important issues to consider.
5 Things to Know about Agency Loans
1. Self-employed beware. To qualify, youll likely need strong, consistent personal income from a third-party employer. These loans are difficult to obtain if you own your own business.
2. Liquid cash reserves. You will need substantial liquid reserves and the required reserves will go up as you grow your rental portfolio.
3. Liability risk. You will have to hold title to your rental property in your personal name. This means you could be sued personally if someone is injured while at your rental property.
4. Documents galore. Your lender is going to go through your income, asset, and tax return documents with a fine-toothed comb. Be prepared for a laborious process.
5. Credit score impact. Agency Loans are reported on your credit report. This can limit your ability to access other types of credit.
5 Things to Know about Bank Loans
1. Low priority. Most community banks focus on making commercial real estate loans and small business loans. While some will make residential investment property loans, it is not their bread and butter. So dont expect a smooth process.
3. Deposits. A lot of banks wont make you a loan unless you have a deposit relationship with them. Be prepared for a bank to want you to keep some cash with them if you want a rental loan.
6 Things to Know about Non-QM Loans
Investment Home Loan Interest Rates
Investment home loans tend to come with higher interest rates. This is because property investors are generally considered to be riskier borrowers than owner-occupiers. Its also because APRA recently had a growth cap imposed on the amount of investment lending that ADIs could conduct, however, this cap was lifted in July 2018.
But if you spend the time to do some research and you should if youre taking out a home loan youll see that there are still home loans out there for investors with rates below 4%.
Savings.com.aus home loan repayment calculator shows that the difference between a 4% and 5% interest rate on a $500,000 home loan is nearly $300 per month and over $100,000 across a period of 30 years. In regards to savings, that difference speaks for itself.
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What Are Investment Property Mortgage Rates
Investment property mortgage rates are the interest rates lenders charge for an investment property loan. The rate youll get is determined by your credit and financial profile, including the size of your down payment. In general, the higher your credit score and the more down payment you can make, the better your rate.
Free Anz Property Profile And Equity Report
You may have equity you could access to borrow for renovations, build a house, or to purchase an investment property. Our free ANZ Property Profile and Equity Report can help you understand how much equity you may have and how you could use it.disclaimer
- How much could I borrow?
- What could my repayments be?
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Tips For Getting The Best Investment Property Mortgage Rates
Even small differences in interest rates can add up to thousands of dollars over the full period of your mortgage. The mortgage interest rates for investment property depend on certain characteristics lenders look for when assessing a borrowers application for lower interest rates.Here are some tips for getting better interest rates.
