Very good question that’s been asked. Best loan for an investment property. Very good question. And very long answer. It really depends on your situation and whether you’re still in a mortgage for your own house or whether you own your own house.
What I do like is variable to start with, because it gives us additional flexibility in what we want to do. The other thing I would suggest with an investment property is an offset account, rather than a redraw, because it can get tricky if we’ve already got a redraw and you want to refinance that loan. Whereas if you’ve got an offset, you can just pull the money out of the offset at any time.
But the primary question that we need to answer with the best loan for an investment property is interest only versus principal interest. If you used to have your owner occupier house with a loan on it, well then why do we want to be paying off the principle on the tax deductible mortgage, which is your investment property when we could be funnelling that money into a non-tax deductible mortgage, which is on your owner occupier?
So, every situation is going to be different for everybody. But generally, if I’m hedging my bets on a safe answer, I’m going to be saying for most people, we want to go to interest only. Okay? To allow us to pay off our owner occupier loan faster. If we don’t have that mortgage, well then it’s fine. We can do principal interest.
At the end of the day though, we’re interest only or principal interest. What really matters is the additional payments that we make. The more additional payments that we make, the faster we are going to payoff that loan. And the faster we pay off that loan and turn that property into a positive cashflow property, the faster that investment property is going to start funding the purchase of a second and then a third investment property.
The other question we get asked is why are interest rates higher for an investment property? Another good question.
And generally, the answer is because of risk. The banks have all these risk [inaudible 00:02:09]. And so therefore, when you’re looking at interest rates on investment properties, there’s a higher risk with them, probably because of tenant damage, people being unable to afford them because they might not manage their money properly.
And so by putting a higher loan on that property transaction in interest rates. And I guess it’s a less competitive market compared to owner occupier, so they can price accordingly because they have less competition. Is maybe a better word to use.
So, are interest rates higher? Well obviously, I’ve just answered that question. Yes, they are. And how much higher can they be? Well really, it really depends on the loan that you’re going for. It could be half a percent to a percent higher.
If it’s our mortgage product, for example, I’ll give you a demonstration. We have a home loan at 0.75 of a percent. That’s right. Point seven five, not even 1%. And what we do is, that’s counterbalanced by the maximum interest rate that you can get at this point in time on this one property. So, we’re dialing down the interest rate on owner occupier, increasing interest rate on your investment property, maximizing your tax deductions.
Otherwise, in the market, we could be bringing in across 2.39 and 4.39 and then it was just a complete standalone. We’d probably get something into threes for investment property. So it really depends on the situation.