Types of loans for investors explained

Selecting the right loan for your property investment will depend on what your investment strategy is and what is available to you depending on your financial situation.

However, with so many different loans available, knowing which one is right for you may be a difficult decision if you don’t understand how they work.

Here are four common types of investment loans explained.

  1. Interest-only loans

With this type of loan, you will not be paying off any of the loan amount; only the interest – hence your payments each month may be lower than other types of loans.

This type of loan is favoured by many investors partly because you can easily see the amount of interest being paid, and partly because it will fit with their property investment strategy.

One aspect which is good to bear in mind is the loan often will come with an interest-only period of time (from 1 up to 5 years) before the repayments for the loan kick in.

So, you need to be sure you can afford the additional repayments once you’re off the interest-free period of time. When the repayment aspect does kick-in, some investors renegotiate the loan terms or they look for another provider willing to give another interest-only loan.

  1. Principal and Interest (sometimes known as repayment loans)

As the name suggests, this type of loan involves paying off both the principal amount borrowed and the interest, meaning that over time, the interest aspect of the loan will reduce. Repayment loans are usually favoured by homeowners rather than investors as a homeowner usually has the intention of eventually owning the property.

Because the amount of interest will go down, it will affect your tax-deductible benefits for investors.

  1. Fixed loans

As the name suggests, this type of loan means the interest rate is fixed, usually for a set period of time. Generally, the interest rate is slightly higher than variable loans, meaning you will be paying more, but it does mean if there is a rate rise, you may not be affected by it.

  1. Variable loans

With this type of loan, the rate varies based on interest rate fluctuations ie if interest rates go down, the repayments will drop and if rates go up your payments will go up.

Some providers offer some flexibility, allowing you to make higher payments than the minimum so you are effectively contributing to paying off part of the loan.

  1. Split loans

A split loan entails fixing the interest rate on a portion of the loan amount, and the other portion of the loan on a variable interest rate.

You can make the split 50-50, 60-40, or you can make up a number!

For instance, if the loan is for $600,000, you may choose for $200,000 to be on a fixed rate and $400,000 to be on a variable rate.

These are useful if you want to reduce the risk of interest rates rising.

Depending on your provider, you may get other benefits with your loan such as redraw facilities, offset accounts and credit cards.

Our advice is to speak to a financial specialist, such as a qualified mortgage broker. They will talk you through the different loans available to your financial situation so you fully understand the risks involved with the different loans.

When you’ve spoken to a specialist, come and talk to us!

We’ve been helping people realise their financial dreams through property. If you want to know more about our property management services or investing in property, simply give us a ring on 02 4956 9777, send us an email to mail@newcastlepropertymanagement.com.au or pop into our Cardiff office for a chat.

For more property management tips check out our Facebook page: www.facebook.com/NewcastlePropertyManagement